Prior to buying my commercial property I owned a single family home that I lived in. I was also renting out the other room to help with the mortgage. Around the beginning of the year, the owner of the property where my market/cafe sits approached me about buying the property. It was such a great opportunity to own my property where my business sits! But how? I had no money down. My businesses were doing OK but not well enough that I had an extra $50,000 to put into the down payment of the property. But I had to see if I could do this real estate project.
The first thing I did was sign an Intent to Purchase or Purchase and Sell Agreement. This little document bought me 6 months of time to find and qualify for a bank loan. The cost of this time was $4,000. Ouch. I had 6 months to find a loan. If I was successful in finding the loan, the $4k went toward the purchase of the property. If I couldn't find one, the sale was off and I would lose my $4k. Double ouch!
Well in the next three months, I applied to every bank I could think of and a lot of banks that I've never even heard of. Out of 10 banks, one guy thought I had a chance. I had to sell my house first. €So if I sell my house, will you qualify me for a loan?€ I asked. Nope. €Once you sell your house, we can see how much down payment you have, and then, we may be able to qualify you for a loan,€ said the loan guy.
So worst case scenario, I sell my house, can't get the loan, can't buy the property, and I'm out $4,000. Ouch, ouch, ouch! But wait! I'm a small business man. This is what we do. We take risks like these because we can. We live in a country where failure in this particular situation doesn't mean I won't have food to eat. This type of failure won't put me out in the street. It just means that I put my investment into some other type of investment and keep moving forward. That's why a risk like this isn't really a risk€¦maybe more like a setback.
Here's where I'll put the link for this future blog post on: How to sell your home.
So where's the How to Get a Commercial Loan part? Okay, here's what you'll need (consider these tools for your business loan):
You will need a down payment. I've heard that banks are really strict on requiring 20% down and 9 out of 10 of them are. I happened to have a 14% down payment and accurate financials and a solid written plan based on actual sales figures on how I would make those payments.
Profit and Loss statement - you'll need three years worth. Be as accurate as you can. Even if you're not making a profit, don't be too discouraged. Making a profit is not the only measurement that will be used.
Balance Sheet - again, three years worth and as accurate as you can. Be honest in these documents. Don't worry about what they reveal. The loan officer will know when you're not being totally honest. If you're fully up-front with them, they will show you how to make you and your business more attractive on paper.
Business and Personal Tax Returns - three years worth.
Excellent credit is a must. I would say a credit score above 700 is important.
For the third time, you'll need the above documents as accurate as possible. It's a good idea anyway to get your boOKs as accurate as possible right now just in case an opportunity comes up. These documents are your tools to help you qualify for your loan.
Another tool that I really leaned on was a spreadsheet that helped me forecast my Profit and Loss statement. It's in Excel (or I use Planmaker, the Excel copy-cat in the free office suite from Softmaker). This tool allowed me to reveal in real-time a few months worth of actual sales and expenses. And then I could follow the trend to forecast up to two years into the future. Whether or not I could continue any increasing trend in sales was arbitrary. I just needed to convince my loan officer that I could keep doing this. And it was true, I did think I could actually increase my sales.
Armed with these tools, I met with loan officers from ten different banks large and small. I met with a venture capital bank. I was finally able to land an SBA loan with Seacoast Commerce Bank, a commercial bank. These guys went to bat for me and I am thankful for them everyday.
The moral of the story is that there's no easy direct way to get into the commercial real estate game without a lot of assets to put down. That doesn't mean you can't do it. You have to do your homework and you have to be willing to put your small business under the microscope. Don't be afraid to explore crowd-sourcing as an option. Prior to learning that my loan was passed, I was exploring options with my neighbors about potential investment type opportunities with them. If you create a business worth something to your neighbors, they will want to see it and you, stay.
Do you have any commercial loan experiences to share? Feel free to comment about them below. And as always, I'll be happy to help with any advice.
The first thing I did was sign an Intent to Purchase or Purchase and Sell Agreement. This little document bought me 6 months of time to find and qualify for a bank loan. The cost of this time was $4,000. Ouch. I had 6 months to find a loan. If I was successful in finding the loan, the $4k went toward the purchase of the property. If I couldn't find one, the sale was off and I would lose my $4k. Double ouch!
Well in the next three months, I applied to every bank I could think of and a lot of banks that I've never even heard of. Out of 10 banks, one guy thought I had a chance. I had to sell my house first. €So if I sell my house, will you qualify me for a loan?€ I asked. Nope. €Once you sell your house, we can see how much down payment you have, and then, we may be able to qualify you for a loan,€ said the loan guy.
So worst case scenario, I sell my house, can't get the loan, can't buy the property, and I'm out $4,000. Ouch, ouch, ouch! But wait! I'm a small business man. This is what we do. We take risks like these because we can. We live in a country where failure in this particular situation doesn't mean I won't have food to eat. This type of failure won't put me out in the street. It just means that I put my investment into some other type of investment and keep moving forward. That's why a risk like this isn't really a risk€¦maybe more like a setback.
Here's where I'll put the link for this future blog post on: How to sell your home.
So where's the How to Get a Commercial Loan part? Okay, here's what you'll need (consider these tools for your business loan):
You will need a down payment. I've heard that banks are really strict on requiring 20% down and 9 out of 10 of them are. I happened to have a 14% down payment and accurate financials and a solid written plan based on actual sales figures on how I would make those payments.
Profit and Loss statement - you'll need three years worth. Be as accurate as you can. Even if you're not making a profit, don't be too discouraged. Making a profit is not the only measurement that will be used.
Balance Sheet - again, three years worth and as accurate as you can. Be honest in these documents. Don't worry about what they reveal. The loan officer will know when you're not being totally honest. If you're fully up-front with them, they will show you how to make you and your business more attractive on paper.
Business and Personal Tax Returns - three years worth.
Excellent credit is a must. I would say a credit score above 700 is important.
For the third time, you'll need the above documents as accurate as possible. It's a good idea anyway to get your boOKs as accurate as possible right now just in case an opportunity comes up. These documents are your tools to help you qualify for your loan.
Another tool that I really leaned on was a spreadsheet that helped me forecast my Profit and Loss statement. It's in Excel (or I use Planmaker, the Excel copy-cat in the free office suite from Softmaker). This tool allowed me to reveal in real-time a few months worth of actual sales and expenses. And then I could follow the trend to forecast up to two years into the future. Whether or not I could continue any increasing trend in sales was arbitrary. I just needed to convince my loan officer that I could keep doing this. And it was true, I did think I could actually increase my sales.
Armed with these tools, I met with loan officers from ten different banks large and small. I met with a venture capital bank. I was finally able to land an SBA loan with Seacoast Commerce Bank, a commercial bank. These guys went to bat for me and I am thankful for them everyday.
The moral of the story is that there's no easy direct way to get into the commercial real estate game without a lot of assets to put down. That doesn't mean you can't do it. You have to do your homework and you have to be willing to put your small business under the microscope. Don't be afraid to explore crowd-sourcing as an option. Prior to learning that my loan was passed, I was exploring options with my neighbors about potential investment type opportunities with them. If you create a business worth something to your neighbors, they will want to see it and you, stay.
Do you have any commercial loan experiences to share? Feel free to comment about them below. And as always, I'll be happy to help with any advice.