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You Need a Commercial (Business or Construction) Loan But You Have Bad Credit?

Here's What You Need to Know...

With the bigger-ticket loans, your options will be quite a bit more limited if your credit isn't the best. This article will clearly explain what your options realistically are, and how to choose the best course of action based on your current situation...

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First the Basics:

If you're a commercial borrower with poor credit when it comes to getting a commercial loan you're choices are going to be limited. At the best of times commercial lending poses many challenges but coupled with poor credit, the difficulty level multiplies considerably and the options diminish rapidly. In this sort of scenario you will more than likely have to get a hard money commercial loan through commercial hard money lenders.

These are individuals that borrowers turn to when conventional sources (banks, credit unions, trust companies) are not available for the borrower.  

These hard money or private money lenders are the answer for borrowers with unusual situations and more often than not tight timing restraints.  Due to the nature of the risk for these lenders, it's an expensive option for borrowers and is meant only to be a short term solution; to help the borrower resolve immediate and short term issues.  

From the lenders point of view it's meant to “bridge a financial gap” while the borrower restructures debt and or sells the underlying asset in order to remedy his or her situation

Keep in mind that these types of commercial loans are  expensive. Payments are almost always interest only, and the rate itself typically ranges from 11%- 15%.  Points can range from between 2% - 6%.  Terms can be as short 6 months and in some cases I've seen them as long as 36 months, but the average is about 12 months.   

Loan amounts can range $50,000 - $10,000,000 and the loans are for both commercial real estate investors and business owner/users.
Situations that likely require hard money commercial loans:

• Low personal credit scores of borrower(s).
• Lack of liquidity for either the borrower and/or borrowing entity.
• Short time constraints - Needing to close within 10 days, for example.
• Cash flow on investment property not stabilized or too low to cover proposed debt and expenses ratios for a conventional lender.
• Cash flow on business (for owner occupied transaction) to low to meet proposed debt and expense ratios for mainstream lenders.
• Subject property in foreclosure.
• Partnership break up where one partner needs to buy out another
• Construction delays or issues due to cash shortfall for construction
• Plus many more

Three keys to the underwriting process of commercial loans for clients with poor credit are:

1. Loan to Value on the proposed loan will not typically exceed 60% of the value of the underlying asset.  In other words if your property is worth $1,000,000 the maximum loan amount you could hope to get is $600,000.  Now as mentioned you may find some lender who may be willing to go higher but this would be the exception not the rule and at best you would be hard pressed to find any who would go beyond 65%.  

The reason for this is that the lender is mitigating their risk by the amount of equity they leave unencumbered. The lender knows that if you have a substantial amount of equity in the property, you're far less likely to default on payments because you wouldn't want to do anything to jeopardize that equity.

2. Debt Service.  Bottom line, is the borrower going to be able to make the monthly payments? In the case of an investment property, the lender is going to want to satisfy himself or herself that the net income will be sufficient to cover the proposed loan.  In some cases the lender may structure the monthly payments as part of the overall loan provided there is sufficient equity to do so. If the borrower is relying upon income from another business or property to cover the payments the lender is going to want sufficient proof of this. As credit criteria in general tightens and commercial foreclosures begin to rise this is becoming more and more of an issue.  

3. Exit Strategy. In other words, what is the plan for repaying the lender back in full?  Is the purpose of the funds to be able to fix up the subject property than sell it?  Or do you have another transaction that you’re waiting on to complete from which you will use the profits to pay off this loan.  Or your purpose may be to stabilize the properties cash flow than turnaround and refinance with a conventional loan?  If you want the funds, make sure you have to have a rock solid plan on repaying it back. Making sure you can answer this question should be even more important to you than the lender, because if you can't honestly see a clear way of getting out of the loan, don't do it as the carrying cost will wipe you out in the long run.  

The Final Word: If you're faced with a difficult situation in the short term and are in need of a commercial loan, private money commercial lenders are an expensive, but viable option so long as they remain a short term solution and don't become a long term one!

About the Author:

Kam Brar is a licensed mortgage broker and has been directly involved in the lending industry over the past 10 years, bringing with him a wealth of knowledge and experience. His particular specialty throughout his career has been working with "challenge" customers, where it takes creative financing (and sometimes private loans) to accomplish their goals.

His role with ShangriLoan is that of a consultant and mortgage industry liaison.

ShangriLoan Ventures LTD ( does not provide loans or mortgages, and is also not an acting broker in any capacity. is an editorial & directory publishing service and an advertising intermediary connecting borrowers with brokers or otherwise services relevent to their specified needs. is compensated by its advertisers for referring qualified site users who submit a request for a lending/mortgage quote from advertisers who are matched to the users needs. Please see our compensation disclosure and privacy policy for full details on our operating procedures.

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