Ratios And Questions That Commercial Borrowers Should Know

by Wade Henderson

Before you go a bank or financial institution to request information for commercial loans, you should ask yourself the following questions:

Are you happy with the way you have managed your financial responsibilities in the recent years? Have you thought about what commercial loan you can afford? This is important because monthly interest rates you will pay may reduce your capital beyond what you can afford. Would the lender be satisfied with your commercial loans and personal loans history?

When financial institutions give commercial loans, they tend to focus on three main ratios.

The first is the ratio of Loan-to-value, or LTVR. This equals the total of all balances of commercial loans on their mortgages and divides it by the fair market value when their commercial property has been valued. The fair market value is the price at which you, both the seller and the buyer, have agreed to proceed with the sale of the business. Your lender will want to protect trade, so the LTVR rarely exceed 80 percent.

The Debt Proportion is the second ration that a lender will consider when approving your request of a commercial loan. This ration is obtained by a simple calculation of the amount of money you pay each month in concept of debt divided by your income. The numerator will be the indicators of debt or Debt obligation bills and the denominator will be your business capacity to face those commitments. You want this ratio to be as low as possible and never exceeding 0.4.

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.

Mortgage credit institutions and commercial lenders will look at these three ratios and decide what commercial loan is best for you and less risky for them.

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