Myths about Commercial Loans: Part I

From funding expansions to opening a new office, commercial loans can be a great way to give your business the support it needs to fulfill its mission, flourish, and grow.

There’s a lot of conflicting “advice” out there about commercial loans, some of it completely wrong or just out-of-date. If you don’t have significant experience with commercial loans, you might not get the whole picture! To help combat some of the more persistent myths about commercial loans and lenders, we spoke to three of Amplify’s commercial lenders: Shirley Sheffield, Rene Flores, and Alex Olmos. They offered some great tips and advice for prospective commercial borrowers.

5 Myths About Commercial Loans

Here are the facts behind five common misconceptions about commercial loans.

1. You should only consider big banks.

There’s a common misconception that if you need a large loan, you need to go to a large bank. However, many smaller financial institutions are able to lend sizable amounts to businesses of any size or stage.

“It all depends on how big your project is in terms of space and money,” said Rene Flores. “If you’re in the over $40 million range, a big bank might be exactly what you need. If you are in the $40 million and under space, then most credit unions and community banks that lend commercially should be able to help you secure financing.”

Many borrowers are choosing smaller institutions because of the advantages that they offer, like greater flexibility, fewer restrictions, and a more personalized experience.

“Big banks have their issues,” Shirley Sheffield explained. “Their lending teams have less discretion. The management teams who ultimately approve the loans are more likely to have an impersonal relationship with the borrower.”

“There are pros/cons with most, if not all, financial institutions—it really depends on what the needs of the client/member are,” added Alex Olmos. “From a lending perspective, big box banks generally have a tighter credit policy and focus on certain niche industries and/or owner-occupied businesses. Smaller community banks and credit unions can support both owner-occupied and investment real estate.”

2. You need a perfect credit score.

For a lender, your credit score is akin to speed dating. It gives a quick snapshot of your financial history and is one of the first things that a lender will look at.

Olmos underlined the basics behind credit reporting and its purpose: “Your credit report really reflects two important factors: your reported debts and obligations and your ability to repay your loans on time. A key component with any lending request is to demonstrate the project and its ability to support its debt obligations.”

“If you only have 3 minutes to impress and we see a credit score in the 650 range and less with liens, foreclosures, past due payments, and collection items, then you are probably not going to get someone to look beyond that,” Flores explained. “Lenders understand that life happens and will certainly try to understand events and circumstances that impacted your credit score— but we can only explain so much.”

That being said, you don’t need a perfect credit score to get approved for a commercial loan. In fact, a perfect score is rarely seen.

Instead, commercial lenders will take a more holistic approach and look deeper at your financial history.

“A good score helps but doesn’t guarantee a loan approval,” Flores continued. “Lenders look at a variety of criteria to determine whether to lend on a project. They will look at collateral, financial liquidity, business acumen, and previous experience in addition to credit scores.”

3. Only the interest rates matter.

When comparing lenders and loans, many believe that the only thing they need to look at is the interest rate. While your interest rate should be taken into consideration, it isn’t the only thing that matters.

“Interest rates are only one piece of the puzzle. Maturity dates, amortization, origination fees, underwriting fees, prepayment penalties, and trust in your lender and team are all very important,” Flores outlined.

Flores also noted that if you’re working with real estate, there are additional factors to consider like certainty to close. “Can your lender actually close the loan when they say they will? If not, you may be at risk of losing your earnest money. Sometimes the lowest rate is not really the best thing to hang your hat on if the lender cannot close the loan in a timely manner.”

It’s important to consider the relationship that you will have with the lender. Sheffield pointed out, “Lenders and borrowers will work together for an extended period of time, and borrowers pay some costs upfront. It is important to have a good, honest relationship with the lender.”

Oftentimes, an established relationship with a lender is far more valuable than a quarter of a percentage difference in rate.

4. You need to go to a financial institution that only does commercial loans.

You might be under the impression that a financial institution that only works with commercial loans will be the best in the business. Flores clarified, “Not only is this untrue, but going with an institution that only does commercial lending may prevent you from taking advantage of institutions that can provide for all your business and personal financial needs.”

Going with a multi-faceted institution can also simplify your personal financial life. “It is convenient to work with a lender who knows you. You are more than your business and may need a loan for a residence, your child’s education, etc.” Sheffield said.

Having your loan, business accounts, and other financial services in one place can streamline managing your finances. But Olmos cautioned, “You want to make sure your financial institution has a true commercial department and understands the industry and asset classes that fit your loan needs.”

5. Applying for a business loan is a lengthy process.

Thinking that it’ll take months to get your loan? It may actually only be a matter of days.

“Applying for a business loan is generally relatively simple,” Sheffield said. ”Generally a multi-million dollar loan can be expected to take a minimum of 30-45 days, if secured by real estate or assets requiring an appraisal to assess value. An unsecured loan, depending upon its size, can be decided in a matter of days.”

However, the length of time the loan takes to process is dependent upon its purpose, size, and required third-party reports. The current market positions also play a role in the turnaround time for loan applications. Hot market conditions may result in more business loans, therefore a longer application time.

Rene Flores offered some helpful hints that can help you speed the process. “Being prepared and presenting clean and accurate financial records certainly helps the cause. Many times, the process is slowed down because borrowers haven’t kept accurate records. Many business owners, especially those starting out, may believe that they can skimp on a good bookkeeper or accountant. That is not the case.”

Beyond a single commercial loan, the way you keep track of your financials can have a significant impact on your business as a whole. “As your business grows, you are doing a disservice to you and your business if you do not have a solid handle on all things financial. You don’t have to be an expert, but you should hire a qualified person to help you and your record-keeping,” he adds.

Commercial Loans Are More Attainable Than You Think

The bottom line is that it may be easier to get a commercial loan than you think. As a business owner, you have a number of options that go far beyond your large lenders. Smaller financial institutions can offer the same products and services but with added bonuses like flexibility and a personal relationship.

When comparing lenders, always be sure to do your homework. Look at interest rates alongside other factors, like the certainty of closing and the potential for a lasting business relationship.

Lastly, be prepared when you apply for a loan. Having your financial documents in order can save time for both you and the lender, meaning you can get the money you need sooner.

Stay tuned for Myths About Commercial Loans: Part II!