Commercial Real Estate Loans - Overcoming Rejections

By: Stephen Bush

One of the most frustrating and confusing situations for a business owner occurs when lenders disapprove commercial real estate loans. Since rejected business loans are quite common, it is advisable for commercial borrowers to have a contingency plan in place for commercial loans.

Business owners are likely to be distressed when a commercial 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 commercial real estate loans, a practical solution is suggested for transforming the rejected commercial funding into approved business loans.

Two reasons (tax returns and business plan requirements) could impact virtually all commercial loans. Many loan officers will begin their review of potential commercial real estate loans by stating "We will need to see at least three years of tax returns" and "Can you show me your business plan?" before proceeding.

Small business mortgage 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 business loans 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 real estate loans.

(1) Commercial Real Estate That is Used for Special Purposes. Reason number one for business loan rejections is that the lender does not make commercial mortgage loans for the type of business involved. In a typical example, fewer commercial banks are offering financing for bar and restaurant properties. 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 is realizing that there are reasonable options beyond traditional commercial lenders. There are capable lenders that are interested in special purpose properties. The best loan might be available only from a non-traditional commercial lender when traditional banks won't make the requested commercial loan.

(2) Tax Returns. Reason number two for commercial loan disapprovals is when loan officers find a problem on an income tax return that disqualifies a commercial borrower under the bank's loan guidelines. This "problem" will typically be related to net income after business deductions, but when loan officers review tax returns, there are many possibilities which will result in the same outcome.

Strategy number two for converting the declined commercial mortgage into an approved commercial real estate loan is to apply for a "Stated Income" commercial loan. Very few traditional banks use Stated Income (no tax returns, no income verification, no IRS Form 4506) for business loans. Borrowers should search for commercial lenders using Stated Income commercial financing. Unfortunately, this suggested solution will not work for all loans because of a normal maximum loan amount of about $2-3 million for a Stated Income loan.

(3) Cash Out Limitations. The third reason for rejection of business loans will be seen frequently during refinancing attempts which involve a need to obtain cash by the borrower. 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 is to seek alternative business financing. An important goal for a commercial borrower is to find a lender that will not impose unfair restrictions in how refinancing cash is to be used.

(4) Collateral Required. Reason number four for commercial mortgage loan disapprovals is that the bank will not make a commercial loan without sufficient collateral such as a lien on personal assets.

Strategy number four for converting the declined commercial mortgage into an approved commercial real estate loan is for commercial borrowers to 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 and business assets.

(5) Required Business Plan. 0Reason number five for commercial mortgage disapprovals is when a bank's loan officer determines that the business plan does not support the needed commercial loan.

The fifth strategy is to avoid lenders which require a business plan, and this approach can save both time and money. This can result in several 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) Reduce the period needed to complete business financing. A typical time for a business plan to be prepared is one to two months.

(C) Commercial financing approvals will involve fewer requirements when a business plan is not mandatory.

Unfortunately, the circumstances described in this article are responsible for many commercial finance difficulties. However, as noted above, the five key reasons for loan officers rejecting business loans can be overcome by most business owners. Similarly, with proper advice and strategies for small business mortgages, commercial real estate loans that are disapproved for other reasons (beyond the five issues described here) can also result in successful and effective commercial loans.

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