Why is Funding My Small Business with a Real Estate Loan a Good Idea?

If you’ve ever purchased a home your familiar with the phrase location, location, location. We’ve talked before about the importance of collateral when applying for a small business loan. Many times lenders think in terms of collateral, collateral, collateral. With that in mind, real estate loans have been around for a long time and many traditional lenders would rather offer loans to small business owners backed by real estate than almost anything else.

We’ve previous talked about the Five C’s of small business lending, today I’d like to talk about the Three C’s of commercial real estate lending. Nail the following and getting a small business loan backed by real estate will be a piece of cake:

1. Collateral: Prior to 2007, many lenders were regularly approving real estate loans at 75 percent loan-to-value and some went even higher than that. Since then, as property values dropped during the recession, loan-to-value ratios are closer to 60 percent. Keep that in mind when you’re applying for a real estate loan. That’s not to say you can’t get approved for a loan-t0-value of higher than 60 percent, but you’ll need impeccable credit, strong revenues, and a superior track record in business. This also means if you’re purchasing real estate you’ll need a little more down than in the past. Instead of 25 percent, you’re likely going to need 40 percent.
2. Cash Flow: If you can’t demonstrate to a lender that you have adequate cash flow to support the real estate loan, you’re not likely to find success. Although real estate is good collateral for a loan, lenders don’t like the idea of going through the process of seizing the collateral because of default. A good starting point is a 1.15:1 ratio of available cash to debt payment. Although this ratio isn’t cast in stone, the lender is going to want to make sure your regular monthly cashflow can support the monthly payments.
3. Credit Rating: There is no way around the importance of credit score when securing a small business loan of any kind—and that also applies to a real estate loan. The first think every lender will look at is your credit score. Although some lenders will accept a lower credit score than others, if you can demonstrate the value of your collateral and your cashflow’s ability to support the monthly loan payment. A borrower with no income, poor credit, and no track record is likely not going to get approved for a small business loan.

Using real estate as collateral for a small business loan can be a great way to finance growth, if you can qualify. Please share your successes regarding small business funding with real estate here.

Learn more about business credit cards HERE.

Learn about factoring HERE.

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