What are the basic eligibility requirements for a commercial loan?

As a business owner planning to secure funding for purchasing commercial real estate, what are the fundamental eligibility requirements I should anticipate when applying for a commercial loan, especially regarding my company’s credit history, annual revenue thresholds, time in business, personal credit score, and any collateral obligations?

Basic eligibility requirements for a commercial loan typically include:

1. Strong Credit History:

   • Business Credit Score: A solid credit score (often 600 or higher, though 700+ is preferred) from business credit bureaus (like Dun & Bradstreet, Experian Business, Equifax Business).
   • Personal Credit Score: Good to excellent personal credit scores (typically 680 or higher) for all business principals with significant ownership (20% or more). Lenders scrutinize personal credit as a measure of responsibility and backup repayment ability.

2. Adequate Cash Flow & Financial Stability:

   • Positive Annual Revenue: Consistent, verifiable annual revenue history (often a minimum of $250,000 to $500,000+, depending on lender type and loan size), demonstrating the business generates enough income to cover operating expenses and loan payments.
   • Strong Cash Flow: Positive and predictable cash flow. Lenders analyze bank statements, profit & loss statements (P&L), and cash flow statements to ensure sufficient funds to service debt (principal and interest). The Debt Service Coverage Ratio (DSCR) is critical, usually requiring a ratio of 1.15x to 1.50x or higher (meaning operating income is 1.15x to 1.50x the annual debt payments).
   • Profitability: Demonstrated profitability, though some industries or startups may be evaluated differently.
   • Business Longevity: Established operating history (generally 2-3 years minimum for most traditional lenders) to prove sustainability and track record.

3. Collateral:

   • Business Assets: The loan is almost always secured by collateral, such as real estate (owned or under contract), equipment, inventory, accounts receivable, or other business assets. The loan-to-value (LTV) ratio matters, typically capped at 60-80% for real estate and lower for other assets (e.g., 50-70% for equipment).
   • Personal Guarantees: Most lenders require personal guarantees from business owners with significant ownership stakes (often 20%+). This pledges personal assets as secondary repayment if the business defaults.

4. Viable Business Plan & Purpose:

   • Clear Loan Purpose: The specific reason for the loan (e.g., purchasing real estate, equipment expansion, working capital, business acquisition) must be well-defined and sound.
   • Strong Business Plan: A detailed business plan outlining the market, products/services, management team, marketing strategies, and, crucially, how the loan will be repaid using the business’s projected financials. It must demonstrate the business’s viability and growth potential post-funding.

5. Industry & Business Viability:

   • Profitable Industry: The business must operate in a recognized industry deemed viable and less risky by the lender. High-risk industries (e.g., speculative startups, certain cyclical sectors) may face stricter scrutiny or higher rates/fees.
   • Legal Structure & Compliance: The business must be legally formed and registered (LLC, Corp, Partnership, Sole Proprietorship). All licenses, permits, and registrations must be current. Tax filings (business and personal) need to be up-to-date and show no serious issues.

6. Down Payment (Often Required):

   • A significant down payment is typically required (e.g., 10-30% or more of the total project cost or asset value), reducing the lender’s risk and demonstrating the borrower’s commitment.

7. Experience and Management:

   • Relevant industry experience of the business owners and key management personnel is highly valued, as it increases confidence in the business’s ability to execute its plan and operate successfully.

8. Loan Size and Type Requirements:

   • Minimum and maximum loan amounts vary by lender and loan type (SBA, conventional, hard money). The specific eligibility criteria often align with the loan program’s guidelines (e.g., SBA 7(a), 504, conventional acquisition loan, construction loan).

9. Debt Burden:

   • The business’s existing debt obligations must not exceed a certain threshold relative to its income or cash flow, ensuring the new loan payment can be comfortably absorbed alongside existing liabilities.