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Business Loan Solutions - Commercial Mortgage Loan Strategies
By Stephen A. Bush
Commercial borrowers are likely to be confused when they are 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.
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."
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.
Commercial Mortgage Loan Disapprovals: (1) Limited Use Properties
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.
Commercial Mortgage Loan Disapprovals: (2) Tax Return Requirements
Reason Number Two for commercial mortgage rejections: Loan underwriters find something on a tax return that disqualifies a borrower under the bank's lending guidelines. This "something" will frequently be insufficient net income, but when business loan underwriters look at tax returns, there are many other possibilities which produce a similar result.
Strategy Number Two for converting the rejected commercial real estate loan into an approved business loan: Commercial borrowers will never have this reason to worry about if they have applied for a "Stated Income" commercial mortgage loan. Very few traditional lenders use a Stated Income process (no income verification, no tax returns, no IRS Form 4506) for a commercial loan.
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.
Business Loan Disapprovals: (3) Cash Out Refinancing Limitations
Reason Number Three for business loan rejections: When 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 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.
Commercial Mortgage Loan Disapprovals: (4) Cross Collateral Requirements
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 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.
Business Loan Disapprovals: (5) Requirements for a Business Plan
Reason Number Five for business loan rejections: A bank's loan underwriter or loan officer does not feel that the business plan submitted by the borrower supports the required commercial mortgage loan.
Strategy Number Five for converting the rejected commercial real estate loan into an approved business loan: Business borrowers should experience fewer delays and profit from dealing with a commercial lender that does not have a business plan requirement due to several key 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) 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.
Copyright 2005-2007 AEX Commercial Financing Group, LLC. All Rights Reserved. Contact Stephen Bush at AEX Commercial Financing - Church Loans for unique and straightforward commercial loan - business cash advance advice
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