Business Loans

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One of the most prominent changes with every lender in today’s market are the stricter underwriting guidelines they are imposing on all their borrowers. Because of their previous lackadaisical approach, many lenders have found themselves in great trouble with many closing their doors and claiming bankruptcy. The lenders who are still in business now realize the importance of sound underwriting on all of the loans that come across their desk.

When a loan request is submitted to a lender, a loan processor is typically assigned to the loan to gather all of the necessary documents that the underwriter will need to evaluate the loan and to make sure the borrower will be able to make their payments and still have a reserve for emergencies. The documentation they will require is also required by the regulators that the banks have to answer to. Because of the mortgage crisis, regulators are running around as fast as they can and are extremely picky with what they need as documentation.

While this should have been happening over the past years, it has caused banks to reorganize their underwriting departments and request for more information than they need to ensure they will meet the regulators stringent requirements so they can keep lending. Many of these changes have increased the underwriting process and the amount of paperwork the borrowers need to collect. read more »

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Most business owners are told by bankers and other “financial advisors” that they will have to qualify for their business credit line based on their personal credit score and that they will have to personally guarantee any credit extended to their business, especially if it is a new business.

That is not true.

Understand that there are three business credit bureaus just as there are three main personal credit bureaus. In fact, 2 of them, Experian and Equifax are the same ones who handle personal credit. But the third is actually the most important, Dun and Bradstreet.

When you apply for a loan, lease, mortgage or credit terms, lenders and suppliers will usually start by looking at your D&B “Paydex” score.

The Paydex score is like a FICO score for your business. It shows how your company has paid its bills over the past year or so. read more »

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Calculating global income on commercial loans is all about figuring out the borrower’s TOTAL net income. In other words, underwriters want to know all of the borrowers sources of income and all of their expenses on all business, rentals, and personally. What they are trying to get at is does the borrower cash flow over all.

It’s not uncommon for a borrower to have a few entities that are making money and a few that are not. Likewise, it’s common to see that overall the borrowers expenses exceed what they make through all of their sources of income. In this example no lender in their right mind will extend credit to a borrower that is underwater.

Perhaps an example will help. Say you’re working on a commercial refinance. It’s an owner occupied. Loan amount is $1,000,000 and you think you can get it done at 6.5% on a 25 year amortization schedule. read more »

photo credit: shlomp-a-plompaCommercial loan underwriting guidelines come down to cash flow ( DCR), loan to value (LTV), credit worthiness and property analysis. Although the process to evaluate a potential commercial mortgage is basically the same from one bank the next, their various appetite for both risk and minimum rates of return are what separates one bank from the next.

Underwriting Commercial Loan Cash Flow

Cash flow is paramount to underwriting commercial loans. Within the industry the cashflow analysis is refereed to as the Debt Coverage Ratio ( DCR). For both owner occupied and investment transactions underwriters normally want to see ratio’s above a 1.20. In other words, for every $1 of mortgage debt the property or business has to have $1.20 of net income to meet the mortgage payments.

Debt coverage ratio minimums vary from one lender to the next, property type and occupancy (investment or owner occ). “Riskier” property types such as hotels or car washes will be required to have higher cash flow levels, ie DCR at or above 1.3. read more »