When is the Best Time to Consider a Small Balance Commercial Loan?

If you’re new to real estate investing – or even if you’re new to commercial investing but you’re well-seasoned in residential – the term “small balance commercial loan” may be a bit confusing. Here, you can learn all about these loans and the best times to consider them to help you improve your investments and your profitability.

What is a Small Balance Commercial Loan?

To put it as simply as possible, a small balance commercial loan is funding that some lenders offer on virtually every kind of commercial property available. It differs from traditional commercial loans – sometimes called “high balance loans” – in that it is much easier to get closed thanks to their looser underwriting guidelines. Whether you’ve had credit problems in the past and you struggle to gain access to traditional loans, or you simply need access to cash more quickly, a small balance loan could be the solution you need.

Qualifying for a Small Balance Loan

A small balance loan looks less at your own personal or business credit history and more at the property itself. There are three factors that lenders tend to take into consideration during underwriting:

  • The type and condition of the property. The lender will want to see what kind of property you are interested in buying as well as its condition. It could be an apartment building in good repair or a multi-company office building that needs a complete overhaul.

  • The property’s cashflow. If the property already has tenants, or if it had tenants in the past, the lender will want to examine rent records to find out how much revenue that property can generate.

  • Your ability to repay the loan. Finally, the lender will want to be sure that you can repay the amount they lend to you, so you will likely need to provide some documentation of your profits, bank statements, and more. If the property’s cashflow is good, this can also be figured into your ability to repay.

What You’ll Need

Before you can be approved for a small balance commercial loan, you will need to provide some documentation. This may include documents called “rent rolls,” which simply show each tenant’s rent amount for each property. It is useful for determining the annual income that the property generates. You’ll also need to provide a list of your expenses, and this includes everything from maintenance and landscaping costs to taxes, insurance, and more. Of course, you will also need to provide identification and verification documents, as well.

You should take the time to learn about the LTC and LTV percentages so you will better understand the possible loan size. Small balance commercial lenders may offer you somewhere between 70% and 80% of the cost and/or value of the property in the form of a loan, which is typical. You should also consider the interest rate you are being offered and remember that because the underwriting process is not as stringent, interest rates on these loans are typically higher than with traditional mortgages.

A small balance commercial loan is ideal for anyone who is interested in investing in a property, but who may have credit problems or other issues that would prevent their approval in underwriting. It’s also ideal for quicker closing, and it can be a great way to gain access to quick funds for renovations, as well.