Business owners are likely to be distressed when a business loan application is turned down and will be unsure as to why it took place and how to avoid a similar problem again. For each of the five primary reasons that a commercial lender might decline a commercial real estate loan, a practical solution is suggested for transforming the rejected commercial mortgage into approved business financing.
There are two reasons (tax returns and business plans) that potentially impact all business owners. Most commercial loan officers are likely to start the commercial mortgage review process by asking something like "Can you show me your business plan?" and "We will need to see three or four years of tax returns."
Commercial property loan requests are sometimes too unique for a traditional commercial lender. In these situations (even if a business owner has an adequate business plan and favorable tax returns), it is not unusual for commercial borrowers to be declined for a business loan by a traditional commercial bank.
The reasons provided below do not represent obscure issues. It is likely that two or three of the reasons described will be important for typical commercial mortgage or business loan circumstances.
Business Loan Disapprovals: (1) Special Purpose Commercial Property
Reason Number One for commercial mortgage loan and business loan disapprovals: The commercial lender does not typically make commercial loans for the kind of business involved or imposes special conditions that make the commercial property loan impossible for the borrower. As one common example, fewer lenders are providing commercial real estate financing for restaurants and bars.
In another example, an auto services business is usually given expensive (and often unnecessary) environmental conditions. There are numerous "special purpose" properties such as churches, campgrounds and funeral homes that traditional banks will exclude from their commercial lending portfolio.
Strategy Number One for converting the disapproved business loan into an approved commercial mortgage loan: For most business owners, there are reasonable commercial loan options beyond traditional commercial lenders.
There are results-oriented business lenders that will readily provide commercial real estate financing for special purpose commercial properties. The best commercial mortgage loan might only be available from a non-traditional business lender when traditional lenders won't offer the required business loan.
Business Loan Disapprovals: (2) Tax Returns Required
Reason Number Two for commercial mortgage loan and business loan disapprovals: Loan officers find a problem on an income tax return that disqualifies a commercial borrower under the bank's loan guidelines. This "problem" will typically be related to net income after business deductions, but when commercial loan officers review tax returns, there are many possibilities which will result in the same outcome.
Strategy Number Two for converting the disapproved business loan into an approved commercial mortgage loan: Commercial loan borrowers will never have this reason to worry about if they are using "Stated Income" business financing. Very few traditional commercial lenders use the Stated Income approach (no tax returns, no IRS Form 4506, no income verification) for a commercial mortgage.
Business borrowers should look for lenders using Stated Income business loans. This approach, however, will not work for all commercial loans due to a prevailing maximum loan of $3 million for typical Stated Income commercial mortgage situations.
Business Loan Disapprovals: (3) Cash Out Refinancing Limitations
Reason Number Three for commercial mortgage loan and business loan disapprovals: When a business attempts to refinance their commercial property loan and wants to get significant cash out, it is normal for a traditional bank to restrict what the funds are used for and to severely limit the amount of cash received. Even though the bank is willing to make the commercial loan, if they won't provide the cash required by the commercial borrower, this is similar to rejecting the loan.
Strategy Number Three for converting the declined commercial mortgage into an approved commercial real estate loan: As mentioned above, there are other commercial lending options available. The commercial borrower's mission (and it is not impossible at all) is to use a commercial real estate lender that will allow them to get much larger amounts of cash out of a commercial refinancing without restrictions on what they do with it.
Business Loan Disapprovals: (4) Requirements for Collateral
Reason Number Four for business loan rejections: The bank will not approve a commercial mortgage loan without collateral, typically as a lien on the commercial borrower's personal residence or other personal assets.
Strategy Number Four for converting the rejected commercial real estate loan into an approved business loan: Commercial mortgage borrowers should seek out business lenders that do not cross collateralize assets as a requirement for receiving a commercial loan. This will provide more options for the borrower and eliminate unnecessary and unwise connections between personal and commercial assets.
Commercial Mortgage Loan Disapprovals: (5) Required Business Plan
Reason Number Five for commercial mortgage loan and business loan disapprovals: A bank's loan officer determines that the business plan does not support the needed commercial loan.
Strategy Number Five for converting the disapproved business loan into an approved commercial mortgage loan: Commercial borrowers should save money and avoid possible delays by working with a lender that does not require a business plan due to these primary advantages:
(A) Decrease commercial mortgage costs by several thousand dollars. A typical business plan (prepared to normal bank specifications) costs $5,000 to $10,000.
(B) Reduce commercial loan closing time by several months. Business plans can be prepared before or after applying for a commercial loan, but either way the net extra time required will probably be 1-2 months or more.
(C) If a professional business plan is not needed, an approval for the business financing requires one less item.
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