Commercial Mortgage Choices - Business Loan Rejections

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.

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."

Commercial property loan 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 a business loan 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 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 common example, fewer lenders are providing commercial real estate financing for restaurants and bars.

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: For most business owners, there are reasonable commercial loan options beyond traditional commercial lenders.

There are capable commercial lenders that are interested in business financing for special purpose properties. The best business loan might be available only from a non-traditional commercial lender when traditional banks won't make the requested commercial mortgage loan.

Commercial Mortgage Rejections: (2) Tax Returns

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 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.

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 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 Mortgage 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.

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 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) Lower business financing costs by thousands of dollars. An average range for a business plan (prepared according to typical bank criteria) is $5,000 - $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.

Article Source: Loan Info Center

Stephen Bush and AEX Commercial Financing publish the Commercial Real Estate Loan Guide and offer a free series of Business Loan - Working Capital Reports
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