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Business owners are likely to be distressed when a business loan application is turned down and will be unsure as to why it took place and how to avoid a similar problem again. For each of the five primary reasons that a commercial lender might decline a commercial real estate loan, a practical solution is suggested for transforming the rejected commercial mortgage into approved business financing. 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. 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 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. Commercial Mortgage Rejections: (1) Special Purpose 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. 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. 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 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. Business borrowers should look for lenders using Stated Income business loans. This approach, however, will not work for all commercial loans due to a prevailing maximum loan of $3 million for typical Stated Income commercial mortgage situations. Business Loan Disapprovals: (3) Cash Out Refinancing Limitations 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 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. Business Loan Disapprovals: (4) Requirements for Collateral 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 Mortgage 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 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 commercial lender does not need a formal business plan, there is 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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