Are you in the market for a commercial loan?
Maybe you’re looking to start a business and you need startup funds. Or perhaps your business is already in existence and you’re in need of working capital. Or maybe you want to purchase commercial real estate and need help with financing.
Regardless of your reasons for getting , you’re making a big financial move. Commercial loans are typically large amounts, and the repayment period can span several years.
There are important things you need to know before getting a loan for commercial use; otherwise, you could make a costly mistake that you may never recover from.
Read on to learn more!
Your Personal Credit Matters
If you’ve never taken out a commercial loan in the past, you might think that lenders have no interest in your personal credit history. After all, you’re getting a loan for commercial use, not personal use, right?
Nothing could be further from the truth.
Your personal credit history matters when you’re applying for a commercial loan. Your lender will want to know that you’re creditworthy before approving your loan.
It’s standard practice for lenders to place a minimum credit score requirement for borrowers of commercial loans. If your personal credit score is lower than the requirement, the lender can reject your application, regardless of how positive your commercial prospects look.
If you’re taking out a commercial loan to fund a business loan, lenders will also look at the credit history of your business. If your business has no credit history, a lender can reject your application.
It’s essential to check your personal and business credit history and ensure they meet your preferred lender’s requirements before you make an application.
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Commercial Loan Lenders Aren’t Created Equal
One of the things you need to do when you’re in the market for a commercial loan is to find a commercial lender. There isn’t a shortage of options. Commercial and retail banks, credit unions, and private money lenders can all be ideal lenders for you.
Here’s the thing, though. Commercial lenders aren’t created equal. Certainly, each lender has unique lending requirements.
The big question is: how do you find the best lender for your needs?
You shouldn’t submit your application to the first lender that you find. Neither should you submit multiple speculative applications, hoping that at least one lender is going to approve your application. This can hurt your credit score.
It’s your responsibility to do extensive market research, evaluating various commercial lenders in the process. Zero in on lenders who specialize in lending to people or businesses like yours.
If you’re a small business, for example, focus on finding lenders that have a reputation for making loans to small businesses.
Some lenders specialize in making loans according to loan purpose. For instance, some lenders offer hard money commercial loans only. So, if you’re looking to purchase commercial real estate, this is the type of lender you need.
Once you have identified a suitable lender, approach them and ask about their commercial loan requirements. Lenders routinely offer loan pre-qualification services, which enable prospective borrowers to know whether they qualify for the loan.
Relationship History with a Commercial Lender Counts
It’s not a must to have an existing relationship with a commercial lender for them to approve your loan, but it certainly helps.
You see, lenders incur risk when they make a loan to a borrower. There’s always a chance a borrower can default on the loan, which can, at the worst, cause the lender to incur a total loss. To prevent this, lenders prefer making loans to clients with whom there’s an ongoing financial relationship.
As such, it’s beneficial to build a relationship with a lender before you apply for a commercial loan. If you’re eying a business loan, for instance, you can open a business bank account at the branch and keep it active. After building a banking history for some time, you will feel confident of getting approved for a commercial loan, especially if it’s a large loan.
That being said, there are several lenders who don’t mind lending to new clients. These are usually lenders of commercial real estate loans. Since these loans are secured, lenders incur little risk.
Commercial Loans Can Be Secured
In fact, most commercial loans are secured.
Speaking of a secured loan, it means the loan has collateral attached to it. This is usually the case with commercial real estate loans.
When you get a mortgage, the loan is secured against the home, right? This is advantageous for both the borrower and the lender. You’ll likely get a lower interest rate but if you default on the loan, the lender has every right to come after the collateral, repossess it, and sell it.
If you’re going in for a secured commercial loan, you need to understand what you’re getting into. The risk of collateral repossession is always there, so you must ensure that you don’t default on the loan.
Getting a Commercial Loan Is a Sensible Move
A commercial loan can come to your aid in your hour of need. If your business is in a cash crunch, this loan can provide the funds you need to keep it going. If you’re investing in commercial real estate, this loan will provide the funds you need to acquire the property.
However, a commercial loan is a big commitment. With this guide, you now know some of the most important things to keep in mind before applying.
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