What Are Commercial Lenders Looking For? Demystifying Loan Requirements

What Are Commercial Lenders Looking For? Demystifying Loan Requirements

At Big Sky, we like to dream. Our very organization started with a vision for excellence in commercial construction. As we saw the need for teams that make up our design, build structure, we continued to push ourselves to learn, grow, and excel. If you are passionate about your business or calling, you are probably right in the middle of a big dream today.

Good fortune is what happens when opportunity meets with proper planning. —Thomas Edison

Dreams generally involve growth. But how can you be sure the timing is right for your particular business or organization to grow, to expand, to add on a new wing or a new building?

The first question, obviously, is whether the project is financially feasible or not. How much can you borrow and how will you be able to manage all associated costs of the development?

Do I Really Have Enough?

That’s the main question you’ll need to answer. Surprisingly, most people only think they have their numbers right. You’ll need to understand what a commercial lender will look for when providing financing for commercial construction or development. Lenders are looking after their own safety first so when deciding whether to finance your project they will assess the risk and then the viability of the development itself.

Check out the following pointers:

Lenders calculate financial feasibility on a three-year timeline. They want to see three years in positive trending net income having the ability to support 125% of the loan amount, so 25% income above and beyond the loan payment.

Commercial Lenders also use the EBITDA acronym:

Earnings Before Interest, Taxes, Depreciation and Amortization – EBITDA

Sounds like a Word Jumble but it’s actually an important tool lenders use to figure out whether a company is financially fit or not.

The idea behind EBITDA is to show how much money a company is making before taxes, depreciation and amortization have been deducted. Breaking it down to simplest terms, the interest is what a business pays for the use of a lender’s money, tax is what’s owed to the IRS, and the last two, depreciation and amortization are accounting ways to reduce the costs buildings, supplies, and equipment.

Sounds simple. So, where are the mistakes made?

Forward Thinking

Great for keeping you moving ahead toward business goals — horrible for realistic financial feasibility assessment. Forward thinking leads us to make projections about performance in ideal circumstances. Lenders don’t care about projections so don’t waste your time gathering market statistics, trends, and demand. Your calculations may be spot on, but remember —your lender is not your partner or a venture capitalist. They are looking for insurance, not potential.

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Commercial construction loans can quickly become complex and without the right team behind you, it’s easy to submit the wrong information and end up with a poor evaluation.

The tips we offer should help demystify the requirements. In future posts we’ll go into various parts of this process in detail. In the mean time, if you have any specific questions about commercial construction loans and your next building or expansion project, we’d love the opportunity to answer your questions.


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