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Anatomy of a Successful Commercial Loan

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Someone asked me the other day what an ideal commercial borrower is like. My immediate response was, “someone who doesn’t need a loan.” In other words, someone who has enough liquid assets to finance their own deal. Sadly, most commercial real estate investors are fairly highly leveraged and, if they’re very active, have likely made some mistakes in their investing history. This article is even more relevant since COVID, as lenders are still looking for “excellent” borrowers. Here’s what the ideal borrower looks like.

First of all, the Collateral

Lenders prefer assets (aka collateral) that would be in high demand and have a high resale value if they had to take the asset back. This means larger population centers where there is a bigger buyer pool, and an active, growing economy that would enhance the demand for this type of asset. If your asset isn’t that, it needs to really shine in your market category and/or have lots of upside potential.

Secondly, Good Cash Flow

A lot of investors like under-performing assets because there is an opportunity to improve the asset and benefit from the appreciated value. Lenders, on the other hand, prefer properties that are “fully stabilized,” i.e. already generating plenty of cash to make sure the monthly debt payments will be covered. If your property or business is at less than full capacity and is still generating lots of cash, that’s great!

Lastly, a Financially Strong Borrower

Back in the day, the rule of thumb for bankers was a borrower whose net worth was at least as big as the loan they are seeking. And for construction, a net worth twice the loan amount. Today, lenders want to know that borrowers have a “cushion” in case of unforeseen problems, and experience that demonstrates their ability to perform under pressure. If you’re short on cash or have dings on your credit, consider bringing in a financial partner to shore up your balance sheet.

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If you are a potential borrower or broker or other financial advisor and want to know if your client is able to measure up as a commercial borrower, give us a call!  SOFIA Capital Ventures offers no-fee loan evaluations of any potential scenario. We will match your deal to the best fit in our commercial lender network, or let you know we can’t handle your scenario, and why. CONTACT US today!