Commercial Mortgage and Business Loan Options
by Stephen A. Bush
Business borrowers will probably be confounded if their commercial mortgage application is turned down, and they may be unsure as to why it occurred and what to do about it. For each of five key possibilities that a commercial bank might reject a business loan, a practical approach is described for changing the declined commercial real estate loan into an approved commercial loan.
Two reasons (tax returns and business plan requirements) could impact virtually all businesses. Many business loan officers will begin their commercial loan review process by stating "We will need to see at least three years of tax returns" and "Can you show me your business plan?" before proceeding.
Business projects are occasionally too unique for business financing via a typical commercial bank. In these circumstances (even if a borrower has an acceptable business plan and tax returns), it is not unusual to be declined for a commercial loan by a traditional commercial lender.
The reasons provided below represent commonly-found issues. It is likely that several of the reasons will be relevant for most business loan scenarios.
Reason Number One for commercial mortgage rejections: The bank does not generally make business loans for the type of business involved or imposes special requirements that make the commercial loan impractical for the commercial borrower. For example, fewer banks are making commercial mortgage loans for bar/restaurant properties.
Similarly, auto service businesses are frequently given unnecessary (and expensive) environmental reporting requirements. There are many "special purpose" properties such as funeral homes, campgrounds and churches that most traditional banks will not include in their business lending portfolio.
Strategy Number One for converting the rejected commercial real estate loan into an approved business loan: For most commercial borrowers, there are viable commercial mortgage options beyond traditional commercial lender choices.
There are action-oriented non-traditional commercial lenders that will offer commercial mortgage loans for most special purpose commercial property situations. The best business financing could be available only from a non-traditional lender when a traditional lender won't provide the necessary commercial real estate loan.
Reason Number Two for business loan rejections: A loan underwriter finds an issue on tax returns that disqualifies a business borrower under the bank's lending standards. This "issue" will often be inadequate net income, but when commercial loan underwriters analyze income tax returns, there can be a wide variety of other possibilities which produce the same disapproval.
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.
Commercial borrowers should seek out lenders using Stated Income commercial loans. However, this strategy will not work for all business loans since there is a maximum loan amount of $2-3 million for most Stated Income commercial mortgage loan programs.
Reason Number Three for commercial mortgage rejections: When a business is refinancing their current commercial mortgage loan and wants to get a large amount of cash out for various uses, it is not unusual for the bank to restrict what the funds are used for and to limit the cash to amounts as small as $100,000. Even though the bank might make the business loan, if they won't provide the amount of cash needed by the commercial borrower, this is equivalent to declining the loan.
Strategy Number Three for converting the rejected commercial real estate loan into an approved business loan: As noted above, there are other business financing options to consider. The borrower's objective is to use a commercial mortgage lender that will permit more cash out of a commercial property refinancing without significant restrictions on what can be done with it.
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 disapproved business loan into an approved commercial mortgage loan: Business borrowers should seek out commercial lenders that will not "cross collateralize" assets as a stipulation for getting business financing. This will result in more flexibility for the commercial borrower and preclude unwise (and unnecessary) connections between business and personal assets.
Reason Number Five for commercial mortgage rejections: A bank's loan officer or loan underwriter is not satisfied that the business plan provided by the commercial borrower supports the requested business loan.
Strategy Number Five for converting the declined commercial mortgage into an approved commercial real estate loan: Commercial borrowers will incur fewer business loan costs and delays with a commercial lender that does not require a business plan due to the following major benefits:
(A) Reduce commercial loan costs by thousands of dollars. A common range for an average business plan (prepared to typical bank specifications) is $5,000 to $10,000.
(B) Decrease the closing time for a commercial mortgage by a month or more. The additional time required for business plan completion is likely to be at least a month .
(C) If a professional business plan is not needed, an approval for the business financing requires one less item.
Copyright 1995-2008 AEX Commercial Financing Group and Stephen Bush.
Contact Information
Stephen Bush
Chief Executive Officer
Phone: (937) 780-4030
bush@aexllc.com
PO Box 353, Leesburg OH 45135-0353 USA
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