the reality of commercial financing
There are a lot of articles and hype out there stating that you can purchase commercial properties with little or no money down. They claim the process is simple and anyone can do it, even apply for financing from your phone.
Well, good luck with that.
The reality of commercial financing is; there are A lenders, which consist of your usual Royal Bank, Scotia Bank, Credit Unions etc., then there are the B Lenders which consist a great deal of “Private Money”. A lenders will scrutinize and look over with a fine tooth comb the businesses financial statements for usually a 3 year period. This includes Full financial statements prepared by an accredited Accountant with Profit and Loss and Statement of Assets.
Please take into consideration, these lenders do not know you, they do not know your work ethics, they do not know you would be willing to work 7 days a week 16 hours a day to make your new business successful. They look at numbers on a paper and nothing more. Don’t forget, the current owners of the business you may be purchasing will tell you..."oh…but we take about 50k in cash on top of those numbers." Who cares! If it is not included and accounted for on the businesses financial statements, it means nothing. As well, I would never count on what the current owner claims as additional cash. Its hear say, and that’s it.
B Lenders rely a great deal on the property itself; is it in a good location, condition of the property, is it a viable business. Why? Because they may be getting it back someday in their minds. Fee’s involved? You betcha. Commercial mortgage set up fees; if you require a B lender or private funding, you could be looking at $6,000.00 plus. Fee’s are upfront by the way. Why use a B lender at all? You require more money plain and simple. Its often short term financing that gets you in the door and operating your new business. You are paying a higher interest rate, but after a year or two, look into other avenues.
You will have to be prepared to pay for an appraisal on the commercial property which will run $2200.00 and up.You may have to have an Environmental Assessment of the property; Phase 1 - $2300.00 and up, if the Phase 1 draws reason for concern such as an old underground oil tank, an inconspicuous vent pipe etc. guess what…here comes Phase 2 which could run $9,000.00 and up, Phase 3 the clean up…could be anything. Again, fee’s are upfront. How long does it take to get financing? A good call would be 60-90 days. Bottom line, an A lender may lend you 50% but not likely more. B lender may lend you another 20% with probably some added security. Their rates; A lenders anywhere from 5%-7%, B lenders and private lenders anywhere from 7%-14%.
So no, you can not walk into your neighbourhood bank and expect to purchase a commercial property with ease. It is a lot of hard work, you need to have a good strong business with good financial statements and guess what…MONEY!
Keep in mind all lenders will require you to be prepared. This includes a good business plan on the potential business, your financial history and yes they will perform a credit check, will want to know how much money you have down and where it is coming from as well may require some collateral security. So do your homework! Be prepared. These days in our current economy with the lack of stability in the work force, it is on a lot of people’s minds the thought of owning their own business, creating their own job. It is quite a dream and a good one. Just make sure you know what to expect when it comes to financing that dream.