Do you need funds to run your RV park business successfully? If YES, here are 10 steps on how to get financing for your RV park business with ease.
RV parks are a very lucrative investment, with returns from 10 percent to 20 percent on your money. RV parks are among the highest-yielding of all real estate asset classes. So if you are looking to maximize the return on your money, RV parks are not a bad starting spot.
These parks are majorly owned by smaller owners who have no debt and, therefore, the ability to carry financing on the transaction. When the seller carries the financing at a low interest rate, it compounds the yield you can make on your money, thanks to leverage.
Leverage, as long as the interest rate on the loan is lower than the cap rate of the deal, will give you an even higher return. If you have bad credit, you can still pull off a seller carry loan. Most park owners avoid loan scrutiny, and don’t even require some third party reports like an appraisal.
Additionally, most sellers carry is “non-recourse” in nature; even if you default on the loan and property the is sold at a loss, they note holder cannot come after you for the deficiency. To many owners, running an RV park is so much fun that they’d do it for free. While we don’t advocate that you go that far, the types of duties that owning an RV park include are very appealing.
10 Steps on How to Get Financing for your RV Park Business
Now that you have seen some of the best options for business loans for RV parks, below are the required steps to apply for the business loan of your choice.
- Know Your Credit Score
The very first step when looking to obtain loan for your RV Park is to check your credit. This process includes pulling your credit report to evaluate where your credit score stands, as this three-digit number is a necessary ingredient to borrow money from a traditional lender.
There are several credit scoring models that have their own evaluation system. FICO, the most common scoring model, will analyze a credit score in points, with a range of credit scores: bad credit (300 – 600), poor credit (600 – 649), fair credit (650 – 699), good credit (700 -749), excellent credit (750 – 850).
The calculation of a credit score will typically consist of five major factors: Payment History = 35 percent, Outstanding Balances = 30 percent, Length of Credit History = 15 percent, Types of Accounts = 10 percent, and Credit Inquiries = 10 percent. A low credit score won’t automatically disqualify you from a loan, but it will affect several key factors of your loan, including the size, rate and access to certain loan programs. A quality credit score is a great asset!
- Perform A Credit Audit
After pulling out your credit report and confirming your credit score, it is now time to perform a credit examination. This process is simply about taking a highlighter to your credit report to outline what you did right, where you went wrong, and noting how you can improve. This step is commonly carried out in the beginning stages of applying for a loan, as it can sometimes take weeks, months, and even years to make the necessary adjustments.
- Dispute Inaccuracies, Late Charges & Negative Information
At this point you have to fight inaccuracies on your credit report. Because negative information can adversely affect your chances of securing a loan, it is critical that you don’t only review your credit report, but examine and verify everything is correct.
If you are looking to dispute inaccuracies, it is recommended you contact both the credit bureau and company that provided the information to the bureau. Under the Fair Credit Reporting Act, these two entities are responsible for rectifying inaccurate or incomplete information on your credit report. In most cases, this can be completed in two steps:
- Contact the credit bureau and inform them of the information you believe to be incorrect. Along with providing your complete name and address, this should include identifying each item in your credit report you dispute, explanating why you dispute the information, and a request for correction. This should also include copies of any related information to your dispute.
- Contact the appropriate creditors and explain you are disputing the information they provided the bureau. This also includes sending copies of documents that support your position.
- Clear Off Debts
One crucial element to obtaining a reasonable loan is debt-to-income. Lenders will compare how much you make versus how much you spend, to determine how much you can reasonably afford. In most cases, lenders will not approve if your debt is more than 36 percent of your income, with some lenders requiring more stringent debt-to-income ratios. There are generally two types of debt-to-income ratios that lenders look for:
- Front-End Ratio: This relates to housing costs, including the percentage of income that goes towards the expense.
- Back-End Ratio: This ratio reveals how much of your income goes to debts, such as credit card bills, car payment, child support, student loans and other debt.
When preparing to apply for a loan, the best thing you can do is reduce the amount of money you owe. Reducing the balances on credit cards or other financial obligations will help to lower the percentage of your income that goes towards paying monthly debt. In essence, this will help to free up credit, including the amount of money you can borrow.
- Know How Much You Need
Taking out a loan for an excessive amount of money that is not needed could result in unnecessary extra fees and interest payments. Knowing how you will use the money will help you determine how much you need. Run through calculations of your potential expenditures. Consider all scenarios when making these calculations.
Do your research. For example, if you are looking to expand your park facilities, look at comparable properties online to get an idea of how much you will need to borrow. If you plan to purchase new equipment, compile a list or spreadsheet of related costs to give you an overview of how much money you need.
Aside from helping you save on interest by not over borrowing, it is also necessary for the application process. Lenders will want to know why you want to borrow the money. Doing your research ahead of time and having a logical response for how much you need and why you need it is a critical step in applying for a business loan.
- Know How Much You Can Afford To Borrow
While calculating the amount of your loan is important, also remember that there are limitations on how much you can borrow. To understand how to get a business loan from a bank or other lender, you need to know the various calculations used throughout the loan process to determine how much you can afford to borrow. One of the first things that will be considered is the Debt Service Coverage Ratio, or DSCR.
This number is determined by dividing your annual net operating income by the annual debt payments of your business. The resulting score is used as a metric for determining loan amounts and terms. The DSCR of your business should be higher than 1. This shows lenders that you will be able to make your loan payment even with other debts.
Another calculation used by traditional lenders is the Debt-To-Income Ratio, or DTI. This formula is used to show the relationship between the debt of the business owner and the owner’s monthly income. To calculate DTI, total monthly debt is divided by gross monthly income.
Lastly, it is crucial to understand your return on investment, or ROI. This simply means that the total cost of the loan, including interest and fees, is less than the profits that will come in as a result of getting the loan. Understanding the lending process and whether you can afford to take on a business loan is a critical step to take before accepting a loan offer.
- Decide What Type Of Loan You Need
You have determined what loan amount you need and how you will use these funds. You have reviewed your credit report and score. Now, it is time to determine the type of loan that will fit your needs, as well as the loans that you will be qualified to receive.
- Research Possible Lenders
Now that you know the best type of loan to fit your needs and (and which you are most qualified to receive), the next step is to find a lender. Since interest rates, repayment terms, and requirements vary by lender, it is important to take the time to research your options in order to find the most affordable loan for your business.
Whether that entails researching lenders or asking friends and family, it is important you take the time to examine your choices, as each lender will handle different types of loans. Remember, not all lenders offer the same loans, so it is important for you to conduct their due diligence, especially when finding a lender.
- Prepare Your Documentation
Once you feel that you are ready to go forward with a business loan application, you will want to get a jump start on pulling out the common documents that lenders request. You will find that each lender has specific requirements depending on whom you work with, but you can set yourself up for faster approval by having the following on hand:
- Personal identification
- About three months of business bank statements
- Two years of personal and business tax returns
- Profit and loss statement
- Balance sheet
Although it might seem to make sense that you should apply for a business loan once you hit your low season, the truth is that—in order to be the best candidate for a business loan—you want to apply at the tail end of your high season. That is because lenders look at your business bank account balances to evaluate your candidacy, and you want to be able to show them the months during which you are the most flush with cash.
- Apply For Loans & Compare Offers
Depending on the lender and the type of loan you have selected, you may have to visit a financial institution, call the lender, or apply online. Before applying, it is very important to have a general understanding of the requirements of the lender.
For example, if their business loan credit score requirements are over 700 and your credit is 680, applying for the loan will not only be a waste of time but will also create an unnecessary inquiry on your credit report.
You also want to do your research to find what lenders offer the lowest rates and best repayment terms. When applying for a business loan, you will have to give the lender the reason you are applying for the loan, as well as the amount you wish to borrow.
You should have all of your documentation together to include with your application. Have it in mind that personal and business credit reports will be evaluated by the lender. If there are any negative items on your credit report, you will need to explain these items. All documentation will be evaluated to determine whether you qualify for the loan, including creditworthiness and ability to pay back the borrowed amount.
After documentation has been submitted and the application completed, the approval process begins. For business credit cards or lines of credit, this could be almost immediate. For long-term loans, this process could take several weeks. Once approved, the loan will need to go through underwriting, closing, and funding.
Depending on the loan selected, the entire process could potentially take several months. This is especially true for SBA and long-term business loans from banks and credit unions. If you have applied for multiple loans, such as through an online loan marketplace, compare the offers you have received to determine which has the most favorable rates and terms.