🏦 What Banks Really Look at Before Approving a Commercial Loan 💰

📋 Commercial Loan Approval Secrets: How Banks Evaluate Borrowers and Properties 🔑

What Banks Look at Before Approving a Commercial Loan

If you've ever applied for a commercial real estate loan, you've probably wondered what happens behind the scenes after you submit your application.

Many commercial borrowers assume lenders focus only on credit scores or property value. In reality, banks and commercial lenders evaluate multiple factors before approving a loan. Understanding these criteria can dramatically improve your chances of securing financing and obtaining better loan terms.

At Medallion Funds, we help commercial real estate investors and business owners prepare for lender scrutiny before their file ever reaches underwriting.

Here's what banks are actually looking at.

1. Cash Flow Comes First

The single most important factor for most commercial lenders is cash flow.

Lenders want confidence that the property or business generates enough income to comfortably cover the proposed debt payments.

Most lenders evaluate:

·Net Operating Income (NOI)

·Debt Service Coverage Ratio (DSCR)

·Historical operating performance

·Rent rolls

·Trailing 12-month financials

Generally, lenders prefer a DSCR of at least 1.20x to 1.25x, meaning the property generates 20% to 25% more income than required debt payments.

2. Borrower Credit Strength

While commercial lending is often asset-focused, borrower credit still matters.

Banks review:

·Personal credit scores

·Payment history

·Collections and judgments

·Bankruptcies

·Existing debt obligations

Strong credit demonstrates responsible financial management and reduces perceived lending risk.

3. Experience Matters

Many lenders place significant weight on borrower experience.

Questions lenders ask include:

·Have you owned similar properties before?

·Have you managed tenants?

·Have you completed renovations?

·Do you have industry expertise?

An experienced multifamily investor will typically receive more favorable consideration than a first-time investor purchasing a large apartment complex.

4. Property Quality and Location

Commercial lenders aren't just lending on you—they're lending on the property.

Key considerations include:

·Property condition

·Market demand

·Occupancy rates

·Location quality

·Economic trends

·Deferred maintenance

Properties located in growing markets with strong demographics typically receive stronger lender interest.

5. Liquidity and Cash Reserves

Banks want to know you can weather unexpected challenges.

Most lenders review:

·Personal bank accounts

·Business accounts

·Brokerage accounts

·Retirement assets

·Available reserves

Many lenders require borrowers to maintain several months of mortgage payments in reserve after closing.

6. Net Worth Requirements

For larger commercial loans, lenders often require sponsors to demonstrate sufficient net worth.

A common guideline is:

Net Worth ≥ Loan Amount

This requirement helps reassure lenders that borrowers possess sufficient financial strength to support the project.

7. Business Plan and Loan Purpose

Lenders want a clear understanding of why you're borrowing money.

Strong business plans typically explain:

·Acquisition strategy

·Renovation plans

·Leasing strategy

·Exit strategy

·Revenue projections

·Market analysis

A well-documented business plan can often strengthen marginal loan requests.

8. Collateral Strength

The collateral serves as the lender's security.

Banks evaluate:

·Appraised value

·Loan-to-value ratio (LTV)

·Property type

·Marketability

·Comparable sales

Lower LTV transactions generally receive more favorable pricing and approval odds.

Common Reasons Commercial Loans Get Declined

Many borrowers are surprised when loans are declined due to:

·Insufficient cash flow

·Weak DSCR

·Lack of liquidity

·Poor documentation

·Inexperienced sponsorship

·Property condition issues

·Unclear business plans

Most denials can be avoided through proper preparation.

How Medallion Funds Helps Borrowers Get Approved

At Medallion Funds, we work with over 600 lending sources, including:

·Banks

·Credit Unions

·Agency Lenders

·Debt Funds

·SBA Lenders

·Bridge Lenders

·Private Capital Providers

Before submitting your loan request, we help identify potential underwriting concerns and position your application for maximum approval success.

Whether you're purchasing, refinancing, constructing, or repositioning commercial real estate, preparation often determines approval.

Ready to Discuss Your Commercial Loan?

When lenders understand your story and see a well-prepared loan package, approvals become significantly easier.

Bill Rapp
Partner & Capital Advisor | Medallion Funds

Commercial Lending Nationwide

Residential Lending in AL, CA, CO, NV & TX
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© Bill Rapp, Medallion Funds LLC, Director of Capital Advisory