Net worth equal or greater to loan amount ?

[Nicholas Weckstein]

Was hoping for some clarification on this in reguard to a commercial loan. I’m aware of what net worth is and how to calculate it. Just not so sure I understand it in this way. So if the loan is 1million my net worth has to been one million ? Is this a standard in the CRE space ? Seems that it would be a hard requirement to meet if talking about numbers in the millions.

[Brian Burke]

That is pretty common in the commercial lending space. But it does vary from lender to lender. Some might require some percentage of the loan amount and other lenders might not have any specific requirement. You could try shopping around, you could find the answer you are looking for. 

One way around this requirement is to bring on a partner that has a strong balance sheet. Most lenders can combine the net worth when there are multiple guarantors, so if your net worth is half of the loan amount and so is your partner’s, you cover the requirement. 

How you compensate a balance sheet partner is up to you and that partner. Just like lending requirements vary from lender to lender, a potential partner’s expectations is an individual decision.  Maybe it’s half of the profits (better not be!) or maybe it’s more like 5% or 10%.  It just depends on how much risk they are taking on, what the guarantees look like, whether they are also contributing cash or services or knowledge, etc.