One of the most frustrating and confusing situations for a
business owner occurs when lenders disapprove commercial
real estate loans. Since rejected business loans are quite
common, it is advisable for commercial borrowers to have a
contingency plan in place for commercial loans.
Business owners are likely to be distressed when a
commercial 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 commercial real estate
loans, a practical solution is suggested for transforming
the rejected commercial funding into approved business
loans.
Two reasons (tax returns and business plan requirements)
could impact virtually all commercial loans. Many loan
officers will begin their review of potential commercial
real estate loans by stating "We will need to see at least
three years of tax returns" and "Can you show me your
business plan?" before proceeding.
Small business mortgage 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 business loans 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 real estate loans.
(1) Special Purpose Commercial Property. Reason number one
for business loan rejections is that the lender does not
make commercial mortgage loans for the type of business
involved. In a typical example, fewer commercial banks are
offering financing for bar and restaurant properties. In a
similar fashion, an auto service business is often given
expensive and unnecessary environmental stipulations. There
are many special purpose commercial properties such as
campgrounds, churches, funeral homes and gas stations that
most traditional lenders have eliminated from their
commercial lending program.
Strategy number one for converting the disapproved business
loan into an approved commercial mortgage loan is realizing
that there are reasonable options beyond traditional
commercial lenders. There are capable lenders that are
interested in special purpose properties. The best loan
might be available only from a non-traditional commercial
lender when traditional banks won't make the requested
commercial loan.
(2) Tax Returns. Reason number two for commercial loan
disapprovals is when 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 loan officers review tax returns,
there are many possibilities which will result in the same
outcome.
Strategy number two for converting the declined commercial
mortgage into an approved commercial real estate loan is to
apply for a "Stated Income" commercial loan. Very few
traditional banks use Stated Income (no tax returns, no
income verification, no IRS Form 4506) for business loans.
Borrowers should search for commercial lenders using Stated
Income commercial financing. Unfortunately, this suggested
solution will not work for all loans because of a normal
maximum loan amount of about $2-3 million for a Stated
Income loan.
(3) Cash Out Limitations. Reason number three for business
loan rejections can occur when a business refinances their
commercial real estate loan and wants to get a substantial
amount of cash out. It is common for a traditional
commercial lender to limit what the funds are used for and
to restrict the amount of cash to as little as $100,000.
Even though the bank will provide the commercial loan, if
they won't offer the amount of cash requested by the
borrower, this is equivalent to a loan disapproval.
Strategy number three for converting the declined
commercial mortgage into an approved commercial real estate
loan is to seek alternative business financing. 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.
(4) Collateral Required. Reason number four for commercial
mortgage loan disapprovals is that the bank will not make a
commercial loan without sufficient collateral such as a
lien on personal assets.
Strategy number four for converting the declined commercial
mortgage into an approved commercial real estate loan is
for commercial borrowers to seek out lenders that do not
"cross collateralize" assets as a condition for obtaining a
business loan. This will provide greater flexibility for
the commercial borrower and avoid unnecessary (and unwise)
connections between personal and business assets.
(5) Required Business Plan. 0Reason number five for
commercial mortgage disapprovals is when 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 is
to save money and avoid possible delays by working with a
lender that does not require a business plan. This can
result in several 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) Shorten the business financing closing period. Business
plan preparation is likely to take 1-2 months or more.
(C) If a professional business plan is not needed, an
approval for the commercial financing requires one less
item.
Unfortunately, the circumstances described in this article
are responsible for many commercial finance difficulties.
However, as noted above, the five key reasons for loan
officers rejecting business loans can be overcome by most
business owners. Similarly, with proper advice and
strategies for small business mortgages, commercial real
estate loans that are disapproved for other reasons (beyond
the five issues described here) can also result in
successful and effective commercial loans.
----------------------------------------------------
Steve Bush is a small business loans expert - learn how to
avoid mistakes with commercial loans and find out about
business cash management strategies at AEX Commercial
Financing Group =>
http://aexcommercialfinancing.com
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