A variety of factors should be considered before a business owner initiates the commercial real estate loan process. These include property location, whether the building contains the necessary facilities or will need remodeling, the building’s size, its parking environment, working capital, and many more.
What other items should you consider before entering into a commercial real estate purchase agreement?Cash Flow. A company must demonstrate the ability to repay both the loan principal and interest. Cash flow generated from the business should exceed the debt service by a healthy margin.
Financial Information. Your financial information is fundamental to the borrower-lender relationship. Is it up-to-date? Is it sophisticated relative to the business? Is it easily produced? Does it identify capital that can be contributed by the borrower? So, consult your CPA or accountant prior to your visit to the bank.
Collateral. A secondary source of repayment is needed to offset the potential loss of principal if a business is unable to repay the loan. Banks are not equity partners; they do not share in the upside potential of a business and conversely need to protect against the downside. This is one of the primary reasons collateral adequacy is so important.
Business Plan. A solid business plan that is supported by historical financial information is important to demonstrate the predictability of a company’s forecasted cash flows. If gross revenue has declined, how have you responded to maintain profitability? Show that you are in control of the business.
Purchase or Lease Documents. Evaluate whether you have the necessary capital to enter a real estate purchase or lease agreement, taking into account your current income and current expenses, balanced against your payments for the building. Add to that the costs of maintenance and repairs. Get familiar with the fine print.
Contractor. Choose the party responsible for your building’s future health carefully: do your due diligence and look into the contractor’s financial status. If the contractor is financially weak, the bank may decline due to the company’s lack of financial stability.
Attorney. When closing a commercial real estate transaction, using an attorney can save you a lot of money. Additionally, the bank may require documents to be reviewed by an attorney. If not, we will often suggest you hire an attorney to look after your interests, such as an environmental or title attorney.
Relationship Focused. Build a long-term advisory relationship with your banker. Transactional borrowing may be a thing of the past. If your banker is simply an order taker, do yourself a favor and find one that will take the time to understand your business and provide you actual banking advice.
Character. Last but not least, a borrower’s willingness to repay a loan, even when times are tough, is critical. Credit history and character references are very important.
Choosing a commercial building for your business is a tough decision, and while we can’t make that decision for you, Lewis & Clark Bank can provide you with the tools to help you navigate this often complex process. Contact any of our experts if you have questions.