One of the most difficult business loan scenarios occurs when a commercial borrower is rejected for either a commercial mortgage or commercial loan. There are five specific reasons that account for a healthy majority of business finance rejections. These common business financing application problems are particularly applicable to commercial real estate investment property financing.
Commercial borrowers are likely to be confused when their commercial loan application is 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 real estate loan into an approved business loan.
Two reasons (tax returns and business plan requirements) could impact virtually all businesses. Many business loan officers will begin their business loan and commercial mortgage 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.
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 is not unusual for the business owner to be declined for a commercial mortgage loan by a traditional commercial lender.
The reasons described do not involve unusual issues. It is likely that two or more of the reasons will be applicable for many commercial loan situations.
Commercial Mortgage Rejections: (1) Special Purpose Commercial Real Estate –
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 restaurants.
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 golf courses, 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: For most business owners, there are reasonable commercial loan options beyond traditional commercial lenders.
There are action-oriented non-traditional commercial lenders that will offer commercial mortgage loans for most special purpose commercial property situations. The best business loan could be available only from a non-traditional lender when a traditional lender won’t provide the necessary commercial real estate loan.
Business Loan Disapprovals: (2) Tax Returns Required –
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 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.
Borrowers should search for commercial lenders using Stated Income commercial mortgage loans. Unfortunately, this suggested solution will not work for all commercial loans because of a normal maximum loan amount of about $2-3 million for a Stated Income business loan.
Commercial Loan Rejections: (3) Cash Out 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.
Commercial Real Estate Investment Property Loan Disapprovals: (4) Cross Collateral Requirements –
Reason Number Four for commercial mortgage loan and business loan disapprovals: The bank will not make a commercial loan without sufficient collateral such as a lien on 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.
Commercial Real Estate Loan Rejections: (5) Business Plan Requirements –
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) 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) Shorten the business financing closing period. Business plan preparation is likely to take 1-2 months or more.
(C) If the lender does not require a business plan, there is one less item standing between the commercial borrower and their approved commercial loan.