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Commercial borrowers are likely to be confused when they’re turned down and will probably be unsure as to why it happened and what to do next. For each of the five major reasons that a bank might decline a commercial mortgage, a practical strategy is provided for converting the declined commercial mortgage loan into an approved business loan.

Two of the reasons (business plans and tax returns) will potentially impact all commercial borrowers. Several commercial mortgage loan officers will start their business loan review by stating some variation of “Can you show me your business plan?” and “We will need to view several years of tax returns.”

Commercial projects are frequently too unique for traditional commercial banks. In these situations (even if a commercial borrower has favorable tax returns and an adequate business plan), it isn’t unusual for the business owner to be declined for a commercial mortgage loan by a traditional commercial lender.

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 widely seen example, fewer lenders are providing commercial real estate financing for restaurants and bars.

In another example, an auto services business is usually given costly (and typically 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 will not offer the required business loan.

Commercial Mortgage Rejections: (2) Tax Returns

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 typically 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’re 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’s a maximum loan amount of $2-3 million for most Stated Income commercial mortgage loan programs.

Commercial Mortgage Loan Disapprovals: (3) Limitations for Cash Out

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 isn’t 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 will not provide the amount of cash needed by the commercial borrower, this is equivalent to declining the loan.

Strategy Number Three for converting the disapproved business loan into an approved commercial mortgage loan: As described above, there are other business lending options which should be considered. The business borrower’s goal is to use a commercial lender that will allow larger amounts of cash out of a business refinancing without limitations on what they can do with the cash.

Business Loan Disapprovals: (4) Requirements for Collateral

Reason Number Four for commercial mortgage rejections: The bank will not provide a business loan without adequate collateral, usually in the form of a lien on personal assets such as the commercial borrower’s home.

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.

Business Loan Disapprovals: (5) Requirements for a 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 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 widely seen range for an average business plan (prepared to typical bank specifications) is $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 commercial lender does not need a formal business plan, there’s one less condition to meet for an approved commercial mortgage.

Copyright 2005-2007 AEX Commercial Financing Group, LLC. All Rights Reserved.

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