Loan Preparedness
Dear Readers,
The unknown can be scary, especially when dealing with finances. A recent situation came to our attention. A business owner, Gloria, has a storefront location in Wyandotte County but doesn’t own the building. The rent has gotten too high, so she is planning to relocate business. When she moves business this time, she’d like to purchase the property, so she needs to secure a commercial real estate loan for the first time with a financial institution. Gloria has asked: “what do I need to do before I purchase a piece of business property?”
Josh: Our goal at Lead Bank is to take the fear out of financing. In fact, you should be asking your Banker – wherever you bank - lots of questions about how to evaluate the costs and benefits of owning your building.
Pedro: So, is there a high level process you would recommend for business owners who are wanting to purchase property for their business site?
Josh: Yes, there sure is. A standard documentation list for any business loan request would include the following:
• Most recent and last three year-end financial statements (Balance Sheet and Income Statement) of the business.
• Last three Federal Income Tax returns of the business.
• A current personal financial statement on all business owners.
• Last three Federal Income Tax returns on all business owners.
• Copy of purchase agreement.
A business owner purchasing real estate would typically need to contribute 20% of the purchase price of the property. Typical loan terms would involve a loan term of 3 to 5 years with principal and interest payments based on a 20-year pay off. A banker will typically expect a borrower to generate sufficient income to produce a Debt Service Coverage Ratio of 1.25:1. This is calculated by taking the sum of annual net income plus interest expense and depreciation and dividing the figure by the total of their annual debt payments inclusive of the proposed loan.
Pedro: So, how much do your rates fluctuate with the national interest rates? Is a line of credit rate for a small business owner more about his/her credit history or more about the current, going rate?
Josh: Loan rates are typically based on an index such as Wall Street Journal Prime Rate or long-term rates offered by the Federal Home Loan Bank. These indexes do change periodically based on fiscal policy actions taken by the Federal Reserve Bank. The margin over the index is typically determined based the creditworthiness of the borrower, which factors in, among other things, years in business, earnings, collateral, and financial strength of the business owners.
Pedro: I’ve certainly seen the best results for the business when the business owner communicates with his/her bank directly, openly and candidly – in good times and in bad.
Josh: That’s exactly right. Banks want to help. And at Lead Bank, we want to make sure we understand what a business owner’s goals are before providing them with a solution. For Gloria, wanting a commercial real estate loan, our bankers would first sit down and talk with that owner to understand his business needs and long-term goals to make sure a commercial real estate loan is truly his best option. This is probably the most important thing: can you and your banker talk about the strategy of buying versus renting? First, get the facts, then talk about the goal and the timing with a trusted advisor. That’s how a sound decision gets made.
The first step when considering any significant change to your business should be to talk with your banker. We’d love to hear from you. We are offering $100 to the reader whose question is selected next. Please submit your business questions to together@lead.bank.
