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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. Two of the reasons (business plans and tax returns) will potentially impact all commercial borrowers. Many 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 see 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 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. 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 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 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 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 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. 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 $3 million for a Stated Income business loan. Commercial Mortgage Loan Disapprovals: (3) Limitations for Cash Out 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 rejected commercial real estate loan into an approved business loan: As noted above, there are other business financing options to consider. The borrower's objective is to use a commercial mortgage lender that will permit more cash out of a commercial property refinancing without significant restrictions on what can be done with it. Commercial Mortgage Rejections: (4) Collateral Required 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 declined commercial mortgage into an approved commercial real estate loan: Commercial borrowers should seek out lenders that do not "cross collateralize" assets as a condition for obtaining a business loan. This will provide greater flexibility for the commercial borrower and avoid unnecessary (and unwise) connections between personal assets and business assets. Commercial Mortgage Loan Disapprovals: (5) Required Business Plan Reason Number Five for commercial mortgage rejections: A bank's loan officer or loan underwriter is not satisfied that the business plan provided by the commercial borrower supports the requested business 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) Decrease commercial mortgage costs by several thousand dollars. A typical business plan (prepared to normal bank specifications) costs $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 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: http://www.financemanual.com
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