Top Mistakes To Avoid When Applying For A Commercial Mortgage

For many small and medium-sized businesses in Canada, securing a commercial mortgage/commercial property loan is a high-stakes process towards growth. But let’s be honest— approval isn’t always easy. Lenders have strict requirements, and you could face delays or even rejection if you're not prepared.

We have noticed that small business owners often underestimate the importance of a strong business plan and proper financial documentation. From weak credit score to minor overlooking can delay approval or lead you to higher cost bearing.

To help you avoid these pitfalls, we’ve outlined the most common mistakes businesses make when applying for a commercial mortgage in Canada.

1. Not Checking Your Credit Score

Credit scores play a huge role in loan approval. It acts as your financial capabilities and an eligibility criterion to a lender. 

If your credit score is low, lenders will see you as a high-risk borrower, which means you may secure a loan approval with either high interest rates or outright rejection.

How to avoid this mistake:

• Check your credit score before applying. A score of 680 or higher improves your chances of approval.
  
• Pay off outstanding debts and avoid new credit inquiries before applying for a mortgage.

2. Underestimating The Down Payment Requirement

Commercial mortgages or loan does not cover the entire property cost. Hence, choosing the right loan or line of credit for your small business can save you from payment shocks at the end term. 

Unlike residential mortgages, where you can sometimes get away with a 5% down payment, commercial mortgages typically require 20% to 35% of the total loan value. 

Many business owners don’t plan for this and struggle to come up with the cash.

How to avoid this mistake:

• Start saving early for the down payment.
  
• Explore government-backed financing programs that may offer lower down payment options, various types of lenders, and their loan terms.

3. Not Having Enough Collateral

Lenders need security before they approve your mortgage. If your business doesn’t have enough assets to show, you might need to guarantee the loan or provide additional collateral personally. The higher the asset value - the better the chance of mortgage approval. 

How to avoid this mistake:

• Be prepared to offer real estate, commercial equipment, or business assets as collateral.
  
• Make sure your assets are properly valued so they meet the lender’s requirements. Your asset value should be equivalent or greater than your loan request. 

4. Ignoring The Debt Service Coverage Ratio (DSCR)

Lenders don’t just look at your revenue; they check if you have enough cash flow to cover loan payments. This is called the Debt Service Coverage Ratio (DSCR). A low DSCR means you might not qualify for the amount you need.

How to avoid this mistake:

• Calculate your DSCR by dividing your net operating income by your total debt payments. Most lenders prefer a ratio of 1.25 or higher.
  
• If your DSCR is too low, work on increasing your revenue or reducing existing debts before applying.

5. Not Having A Solid Business Plan

A basic curiosity of any lender is, how you plan to use the mortgage and whether you can pay it back on time. Thus, a weak or vague business plan can hurt your chances of approval.

How to avoid this mistake:

• Prepare a solid business plan that includes financial projections, expected growth, and how the mortgage will benefit your business.
  
• Be ready to explain your revenue model and repayment strategy (do not overcommit your ability).

6. Not Considering Future Interest Rate Changes

If you choose a variable-rate mortgage, your interest rate can increase over time, leading to higher monthly payments. If your business's cash flow is tight, this could create financial stress.

How to avoid this mistake:

• If you prefer stability, go for a fixed-rate mortgage with predictable payments.
• If choosing a variable rate, make sure your budget can handle possible rate hikes.

Related Content:

■ Fixed vs. Variable Mortgages: Which One Is Right For You In 2025?

7. Ignoring Hidden Fees and Terms (Additional Costs)

Many businesses focus only on interest rates and forget about additional costs like appraisal fees, legal fees, and prepayment penalties. They rush through the paperwork without reading the terms carefully. These hidden charges can make mortgages much more expensive than expected.

How to avoid this mistake:

• Read all the terms and conditions before signing.
• Ask for a detailed breakdown of all costs and explanations if you don’t understand anything.
• Read the fine print carefully or consult a mortgage specialist in Mississauga to understand all terms.

8. Not Comparing Lenders

Most business owners go straight to their bank for a commercial mortgage. It may seem convenient, but it may not offer the best rates or terms all the time.

Going with the first lender you find is a common mistake. Different lenders offer different rates, terms, and fees. Some specialize in helping small businesses with flexible approval criteria.

How to avoid this mistake:

• Compare banks, credit unions, and private lenders before making a decision.
• Get quotes from multiple lenders to find the best interest rate and repayment terms.

Secure Your Commercial Mortgage / Property Loan with Mega Mortgages and Financial Inc.

Securing a commercial mortgage approval takes careful planning and attention to detail. It isn’t just about getting a loan—it’s about making smart, calculative choices that set your business up for success. 

By understanding the nitty-gritty of the lending process and its terms and conditions, you can avoid these common mistakes and improve your chances of approval.

The process is challenging, but if you stay clear with your needs and graphs, you can secure better loan terms and avoid unnecessary financial stress.

Need help? Mega Mortgages & Financial Inc. can guide you through the process and find the best loan option for your business. 

Read More: Why Commercial Mortgages Are Important For Business Expansion?