It is rare to find a business that is built or expanded using a single source of fund, let alone the owner’s personal money. Often financing is necessary, and it’s not difficult to understand why. Unlike a residential property that only costs a few hundred thousands or millions, a commercial property can cost so much more. And since a commercial property is set to generate income down the road, financing it has a higher guarantee of return than financing a residential property.
If you are planning to start your own business, taking out a bank loan may be your best option for funding. Keep in mind, however, that applying for such a large loan does not come easy. Banks are concerned about your ability to pay, which is why they will require as much proof as possible before they approve your application. There are several things they will have to ask of you.
Collateral to Back Up Your Loan
As previously mentioned, the bank you are seeking loan from wants to make sure that their investment is secure. As such, they will ask you to present a collateral that could reduce the risk they have to take when they invest in your business. The collateral usually comes in the form of an asset and its kind and value will depend on the size of the loan.
Each type of security or collateral represents a unique set of risks for the banks. The more risks the security helps eliminate, the greater the chance the bank will accept it. Examples of assets that you can present as security are offices, factories, warehouses, and retail spaces. A residential property, such as a house or townhouse is also a good collateral for a commercial loan. Special types of asset such as car yards and aged care centres are less appealing to lenders because they are more difficult to value.
Presenting a collateral is not enough to persuade the bank or any lender that your proposal is viable. Depending on their strategy, they may ask you to present certain financial information, such as all current and past loans and debts incurred, all bank accounts, investment accounts, credit card accounts, and of course, supporting information including tax ID numbers, addresses, and complete contact information.
While death of one or more of the owners of the business is a rare occurrence, banks consider it as a risk that needs to be managed properly. They don’t want to lend money to a business whose finances can easily be shaken by the loss of a founder. So expect that they will ask you to purchase insurance against such circumstances.
There are many other documents that can support your application for commercial loan. Unfortunately, with policies becoming tighter, it will still be difficult to get approval. In case the bank turns down your application, make sure that you have other options to look at. For instance, you may consider going to non conforming lenders for funding solutions.
Non conforming lenders offer loans in a much more lenient way. They do not follow the standard procedure for approving commercial loan applications that most banks use. You may also consider hiring business finance brokers. Experts like IBN Direct can connect you to the most reliable financers.