How Do Lenders Determine the Loan Eligibility of a Real Estate Company?

When a lender receives a business loan application from a real estate company, they will consider several factors before sanctioning the loan. What are these factors?

It is true that lenders do not use a single criterion for approving a loan. In fact, they use several criteria to determine the eligibility of the borrower. For example, as a lender, you may review your business relationship with the firm requesting the loan. You will also get the financial statements of the company scrutinized by a credit analyst. In addition, you may gather reports from third party credit agencies. You do all this to ensure that the borrower has the financial capacity to repay the loan.

After analyzing the financial statements of the company, if you feel that the loan applicant meets your credit standards, you will approve the loan request.

Credit Rating

Before approving the loan application, you need to try and obtain a credit report on the real estate company from a credit rating agency. These credit reports include information about public filings, credit scores and payment histories. Any negative information (e.g. past-due payments or outstanding tax liens) that appears on these reports should act as a red flag. In that case, you may contact the company and ask for an explanation. If the loan applicant fails to provide a satisfactory answer, it’s best to reject the loan application.

It is true that these credit reports are not always up to date; however, they provide useful information about the credit history of the company seeking the loan.

Financial standing

You need to ask the real estate company to show its annual statement for the last two years. You may also request an interim financial statement for the month before. By analyzing these statements, you can get a better idea about the company's financial standing. In particular, what you want to know is the financial status of the company – whether they can repay the loan or not. You may insist that the company should get its annual statements prepared by a reputed public accounting firm.

Collateral

Most lenders require collateral for the bank loan. If the loan is secured with collateral, you can seize the collateral and sell it if the borrower fails to repay the loan. If a real estate company is requesting a loan for buying land, it can pledge the title to the land as the collateral. Some assets do not make good collateral. For example, you might not want to accept the assets that are not readily salable to a third party.

Personal guarantees

You may also require each owner of the firm to offer personal guarantees. Each owner will have to submit personal financial statements. These personal guarantees provide additional security. You can verify these personal financial statements and after approving the loan, ask the owners to execute a guarantee.

Relationship between the lender and the loan applicant

While processing a business customer's loan application, you will have to verify its past and current relationship with the customer. The loan committee is more likely to approve a loan application if the applicant has been a valuable depositor for years before requesting a loan. Community bank officers are more likely to approve loan applications submitted by companies that are actively involved in civic affairs.

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