March 22, 2013

Commercial Loans - What Are the Common Mistakes Made By Borrowers

Today, whether you talk about thriving start-ups or established businesses, acquiring business loans has become quite difficult. Business loan lending has been decreased by 15% since 2008. Banks are also turning down entrepreneurs with outstanding cash and credit reserves in the bank because of their reluctance to fund smaller businesses.

For securing a loan, you have to keep in mind the requirements of the lender. The lender needs to be satisfied that the proposed loan exceeds or at least meets their requirements. At the end, their lending should prove to be a good investment for both you as well as the lender.

Is high credit score all what you need?

Several entrepreneurs assume that if they have a perfect credit and proper funds in their bank loan will get approved smoothly. However, that is not the case these days. Today, before granting loans, the lenders are also looking for an excellent personal credit along with a strong business credit.

Commercial loan problems and mistakes:

Getting an approval for a loan is becoming harder. Hence, entrepreneurs usually make mistakes when it comes to funding their business. Below are some recent examples of commercial loan problems and mistakes:

1. Depending totally on loans as a solution - Until 2007, when it was easy for entrepreneurs to get business loans, it was considered that acquiring loans were one of the easiest solutions for any business problems. The idea of developing self-funding strategies was completely ignored. Instead of opting for loans, it would have been far more beneficial to consider methods of increasing sales, reducing operating expenses and decreasing business debt overall rather than increasing it.

2. Thinking that bank loan will be sufficient - As it was easy to acquire business loans from banks, the idea of considering any other alternative for funding the business was neglected.  As a result of this, entrepreneurs ended up paying high bank fees and charges. Above all, it is observed that in numerous cases, acquiring loan from financial institutions other than the bank is easy and convenient.

3. Lack of proper financial planning - It is a usual thing that a person plans ahead once he goes through a failure. If all the business owners think over the possibilities of something going wrong and prepare a contingency financial plan, the rate at which they require a commercial loan with gradual drop.

What are commercial lenders looking for?

For many people, commercial loan requirements are confusing. Nowadays, every business loan application is viewed and evaluated individually. Lenders take a close look of every application and then judge each of them depending on their own merits. However, there are a few particular threats that they evaluate in each and every loan application.

Loan to value ratio (LTV):

This is that important criteria that every lender will look for. They will make sure before granting the loan that the loan to value ratio is according to their particular requirements.

Financial statements and forecasts:

After LTV, the next thing that a commercial lender will look for is your financial statements and forecasts. They will evaluate and check that all the numbers that you have mentioned makes sense. One more thing that they consider in this regard is a debt service coverage ratio, which is normally referred as DCR. They will definitely like to see whether the property’s income is sufficient to cover the loan payment every month or not.

Successful business history:

Before lending a typical commercial loan, lenders definitely would like to view minimum three years of your business history. If you do not have a proper business history, they will check your personal credit history. Looking at your personal assets they will decide whether they are willing to grant a loan or not.

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