02/10/14

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.

Interested in an MCA loan, click HERE to learn more.

It takes a little cash to change the world.

So what are you waiting for?

About the author

Ty Kiisel
Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business financing and trends accessible in common sense language devoid of the jargon.

Comments

  1. Hi Ty, I am a small business owner. I own a small take out pizza shop for almost 10 yrs now( I rent the building I am in).I purchased a building for 30,000 , it was in a fire so I got it really cheap. I remodeled the whole building and I live in a 2 bedroom apt above it. On the other side on the second floor I am in the process of creating a 3 bedroom. The entire 1st floor is the business.I had 2 real estate agents walk through and as is ,its worth about 140,000 . Now in order for me to open I thought I would have no problem borrowing from the equity of the property . I am looking to borrow 60,000 to get opened. Liquor license, seating , inventory etc… But found out it was not that easy to borrow from the bank. Red flags are showing I made 18,000 last year on taxes and 16,000 the year before. And my credit score went from 780 last year to 685 this year because of a couple credit cards I maxed out to finish my building, not knowing that kills your credit. Was never late on any payments and I thought that’s all that mattered. Was just wondering if you had any ideas for me to get my loan and get my building opened, Any advice would be greatly appreciated. Very frustrated.Thanks Mike

    • You can use our free business loan finding tool to find a loan, we help a lot of people who can’t find a loan through traditional means find one. Banks are pretty picky when it comes to who they lend to, but we’ve got a lot of lenders who are looking for a variety of business situations. Good luck!

      Thanks!

      Erik

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Get more small business tips from Lendio.

More like this