PREPARING FOR A COMMERCIAL LOAN - WHAT TO KNOW AND WHAT TO GET TOGETHER FOR YOUR BANKER

Obtaining a commercial loan can be one of the most important steps in growing or stabilizing a business. Whether a company is purchasing real estate, expanding operations, refinancing debt, buying equipment, or increasing working capital, lenders want to see clear evidence that the business can responsibly repay the loan.

Commercial lending is very different from residential lending. A lender is not only evaluating the property or project — they are evaluating the business itself, the financial strength of the owners, and the long-term viability of the operation.

Below are some of the most important items a business owner should understand and prepare before applying for commercial financing.

Understand the Purpose of the Loan: One of the first questions a lender will ask is: “What is the loan being used for?” The intended use of funds affects: Loan structure, Down payment requirements, Interest rates, Loan term length, and Documentation requirements.

Common commercial loan purposes include:

• Purchasing commercial real estate
• Expanding a business location
• Refinancing existing debt
• Equipment purchases
• Construction or renovations
• Business acquisitions
• Inventory or working capital

The clearer and more organized the business plan is, the stronger the application becomes.

Debt Service Coverage Ratio (DSCR):
One of the most important financial measurements in commercial lending is the "Debt Service Coverage Ratio", commonly referred to as "DSCR".

DSCR measures a business’s ability to generate enough income to cover its debt obligations.

The general formula is:
DSCR = Net Operating Income/ Total Annual Debt Payments

Example:
If a business has:

• $250,000 in annual net operating income
• $200,000 in annual debt payments

Then the DSCR would be:
DSCR = 250,000/200,000 = 1.25

A DSCR of 1.25 means the business generates 25% more income than is required to cover its annual debt payments.

What Lenders Typically Want: Most commercial lenders prefer a DSCR between: 1.20 and 1.35 or higher. A ratio below 1.00 generally indicates the business does not generate enough income to fully service the proposed debt.

The stronger the DSCR:

• The more favorable the loan terms may become
• The lower the perceived lending risk
• The easier it may be to qualify

Business Financial Statements:
Lenders typically require detailed financial information to evaluate the health of the business. Common requested documents include:

Profit & Loss Statements. Usually that includes:

• Current year-to-date
• Previous 2–3 years

These statements help lenders review:

• Revenue trends
• Expenses
• Profit margins
• Overall stability

Balance Sheets. A balance sheet shows:

• Assets
• Liabilities
• Equity

This helps determine the company’s net worth and financial strength.

Business Tax Returns: Most lenders require 2–3 years of business tax returns. Tax returns help verify reported income and consistency.

Cash Flow Statements: Cash flow is critical in commercial lending because even profitable businesses can struggle if cash flow is weak.

Lenders want to understand:

• Timing of receivables
• Operating cash availability
• Seasonal fluctuations
• Existing debt obligations

Personal Financial Information: In many commercial lending situations — especially with small businesses — the lender is also evaluating the business owners personally.

Owners may be asked to provide Personal Financial Statements which may include:

• Bank accounts
• Investments
• Real estate holdings
• Retirement accounts
• Personal liabilities

Personal Tax Returns usually for the past 2–3 years.

Personal Credit Reports as credit history matters because lenders often require:

• Personal guarantees
• Additional collateral support

Strong personal credit can help offset weaknesses in a newer business.

Business Plan and Executive Summary. For startups or expanding businesses, lenders often want to see:

• A business plan
• Executive summary
• Financial projections

This helps explain:

• The company’s mission
• Management experience
• Market opportunity
• Competitive advantages
• Revenue strategy

A strong business plan can significantly improve lender confidence.

Commercial Real Estate Information: If the loan involves commercial property, lenders usually require:

• Purchase agreement
• Property information
• Rent rolls
• Existing leases
• Operating statements
• Property tax information
• Insurance estimates

For investment properties, lenders closely examine:

• Occupancy rates
• Tenant stability
• Lease terms
• Net operating income (NOI)

Collateral and Down Payment Requirements. Commercial loans often require:

• Collateral
• Owner equity injection
• Down payment

Typical down payments may range from:

• 10% to 30%
  depending on:
• Property type
• Business strength
• Loan program
• Occupancy type

Collateral may include:

• Real estate
• Equipment
• Inventory
• Accounts receivable
• Business assets

Industry Experience and Management Strength: Lenders place significant value on management experience. A borrower with:

• Industry knowledge
• Proven operational history
• Strong leadership experience is generally viewed as lower risk.

This is especially important for:

• Restaurants
• Hospitality businesses
• Manufacturing
• Specialized operations
• Startups

Common Red Flags for Lenders: Some issues that may create concern include:

• Declining revenues
• Low cash reserves
• Excessive existing debt
• Poor credit history
• Inconsistent tax reporting
• Unpaid tax liabilities
• High customer concentration
• Significant pending litigation

This does not necessarily mean financing is impossible, but additional documentation or stronger collateral may be required.

SBA Loans and Government-Backed Financing: Some businesses may qualify for programs through the U.S. Small Business Administration. SBA-backed loans can offer:

• Lower down payments
• Longer amortization periods
• Flexible underwriting
• Easier qualification standards in some cases

However, SBA loans often require:

• Extensive documentation
• Detailed financial review
• Personal guarantees

Preparation Improves Approval Chances: One of the best ways to improve the likelihood of loan approval is preparation. Business owners should:

• Organize financial statements
• Maintain accurate bookkeeping
• Understand their cash flow
• Review personal credit
• Prepare explanations for weaknesses
• Work with qualified professionals

Having organized and complete information can speed up underwriting and create a stronger presentation to lenders.

Final Thoughts: Commercial lenders are looking for more than just a property or a loan request — they are evaluating the overall strength, stability, and repayment ability of both the business and its ownership.

Understanding items such as:

• Debt Service Coverage Ratio (DSCR)
• Cash flow
• Business financials
• Personal financial strength
• Collateral
• Management experience can help business owners better position themselves for financing success.

Whether purchasing a property, expanding operations, or refinancing debt, preparation and transparency are often key factors in obtaining favorable commercial loan terms.

Need help preparing and putting together these items? We can help! We also know various banks who might be stronger in areas that you are looking to expand or invest into. We have helped other clients prepare all of the above to give them a better success in succeding in purchasing the property and getting the loan they need.

Reach out to Chris ar 920-279-6104 or chris@cjmassociates.org.