There are a few questions you need to ask yourself before going to a financial institution to request a loan.
How comfortable are you with your past decisions of the finance company? You should know what kind of commercial funding to consider. For example, what kind of rate would feel more comfortable with? Do you feel secure about your history of repayment of commercial loans are personal loans?
Granting commercial loans is no easy business for financial institutions; therefore they need to make sure they minimize their risks. They do so by using three ratios:
The first on is the loan-to-value ratio, or commonly called LTVR. In order to calculate this ratio you need to divide the value of the commercial loans and mortgages for the fair market value of the property. This value is the one that you and the buyer have decided upon and they are both satisfied with. The loan-to-value ratio rarely goes over 0.8, which means that the lender wants to minimize its risks.
The Debt proportion is another factor consider when granting commercial loans. The lender will want to see how much you owe and how much money your business is capable of generating at a monthly basis. You want this ratio to be low to be able to show the lender that you are able to generate income over the level of commercial loans you have. This ratio should not exceed a 40% because that will mean that you are funding you income with debt.
Commercial loans are granted also on the basis of Debt service coverage ratio, or DSRC. However this is only requested when the commercial loans in question are large. The lender wants to see if your current property generates any income.
Calculating this involves knowing what your net operating income and what your debt service ratio are. Your net operating income is determined by dividing the amount of your operative expenses (meaning what you need to spend for the property to be used) by what you actually earn from the property. The debt service ratio will show how much you pay for your mortgage. The DSRC is obtained through the division of the net operating income and the debt service ratio.
Commercial lenders would prefer this ratio to be above 1.0. Otherwise the lender will know that you cannot face yet another commitment.
These factors, along with other types of commercial financing, must be considered along with the mortgage credit institutions and together with any other commercial lender that they can get in touch with.
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