People who own commercial real estate usually need at least one loan from a bank or another source. If you ask to borrow money from a bank, the loan application process can be long and tedious. Because business owners typically ask for higher amounts of money, the bank must do its due diligence before handing you the money.
Who you are
Foremost, the bank wants to know who you are. If you are buying property for a business, the bank may ask to see your business plan.
They will want to know what the business does, how it makes money, and how the property will help the company grow.
Financially, the bank may ask for projections showing that your business will generate enough income for you to repay the loan.
The bank can also ask for financial statements to ensure you have enough money to repay the loan. It might also want to see the purchase agreement between you and the seller.
The property
In addition to getting to know you and understanding what you want to do with the loan, the bank will also want to know as much as possible about the property you wish to finance.
They usually require an appraisal to ensure that the property’s price is the same as, or close to, the amount you are paying.
Environmental reports are another type of documentation that the bank may request from you. Depending on the property’s location, a report ensures that the property does not have environmental problems, like soil contamination.
The location
The bank will also want to know if you can use the property for your intended purpose. Some residential areas, for example, do not allow businesses to go anywhere and have restrictions about where companies can buy buildings for business purposes.
While no one wants to think about a worst-case scenario, the bank will ask you for insurance that protects your property against natural disasters or theft.
If you decide to use the building in a way where you will have tenants, the bank may require that you provide it with a copy of the lease agreements between you and your tenants. This helps the bank understand the potential income the property can generate, which will help you secure the loan.
Lastly, the bank may ask you to personally guarantee the loan. If your business cannot repay the loan, you are personally responsible for paying it back. In riskier loans, there is a higher chance that the bank will request a personal guarantee.