How to Choose the Right Commercial Lender

The market is filled with numerous options of commercial lenders. Some promise funds as fast as 24 hours. Others boast about a high approval percentage or a low interest rate. There are also sites that allow you to access offers from multiple lenders. With all the choices in the market, how do you choose which commercial lender is right for you? By doing your research and considering the following factors.

Determine What You Need the Loan For

This step will help you narrow down the choice of lenders as many lenders prefer to finance certain projects. Some lenders only finance commercial real estate projects. Others may specialize in short-term working capital.

Decide What Loan Terms are Most Important to You

In addition to the interest rate, loans can differ on several other factors including the number of years to repay, whether the loan is fully amortizing or has a balloon payment (a large onetime payment at the end of the loan term), down payment requirements, collateral and personal guarantee requirements, and financial and other covenants that restrict how you operate your business. Many business owners believe the lowest rate is the most important factor. While cost is always an important factor, you must also consider what you are giving up for the lowest interest rate.

Loans with the lowest interest rate usually are accompanied by very rigid other terms and conditions, including balloon payments (3 to 7 years after the loan closes), restrictive financial and other covenants, and significant collateral requirements. When discussing potential loan terms, please make sure the lender provides details on all the loan terms and conditions.

Find a Lender that Understands Your Business

A lender who is familiar with your industry can be the difference between getting your loan approved and getting it declined. The more complicated your industry, the more important it becomes to find a lender who understands your business.

Get to Know the Lender’s Criteria for Approving Loans

Almost all lenders base their lending decisions on the 5 C’s of credit (capacity, capital, collateral, conditions, and character). Capacity is your ability to repay the loan. Capital is how much you have invested in the business and/or the project. Collateral is the assets pledged to secure the loan. Conditions include the loan terms as well as external factors such as the economy, your industry’s market, and industry specific legislation. Character is your experience in the industry and your personal credit. Lenders weigh the 5C’s of credit differently. Understanding how a lender ranks the 5 C’s of credit will allow you to match your strengths with a lender who will approve your loan.

Learn the Lender’s Approval and Closing Process

Most lenders have some form of the following four steps:

  • Qualification

  • Application

  • Underwriting

  • Processing/Closing

The difference with each lender is when the uncertainty of whether your loan will be approved is removed and how long the total process takes. (Please refer to the article “What is the SBA 7(a) Loan Process” for more details.)

Taking the time to find the right commercial lender could be the difference between reaching your goals and failure.