Different Methods of Commercial Finance

Once upon a time, the commercial finance sector was a niche of the market that was dominated by a select few and so the average business owner would invariably find that the range and quality of options available to them were extremely limited indeed. The commercial finance sector was primarily dominated by the commercial lenders, i.e. banks, venture capitalists and angel investors.

The problem with these types of lenders is that the terms and conditions that they impose on the money that they lend out to borrowers is oftentimes, extremely rigidly enforced not to mention restrictive. The business owner who borrowed money from them would find themselves in the unfortunate position of being forced to sell equity in their business, ensure that they sought the approval of the lenders before approving any decision, or be required to pay back the money with astronomical interest rates charged.

Unfortunately, by virtue of the fact that such arbitrary and unfair conditions formed the status quo for the business financing world, this meant that as much as they were unhappy with the terms on offer, business owners were forced to accept the conditions as there was no other alternative.

However, many business owners did not actually take the time or effort to conduct an appropriate level of due diligence into the process and as such then, they merely assumed that because the general sentiment was that they would be forced to be locked into unfair terms, there was little point. However, the simple truth of the matter is that when it comes to business financing, shopping around for the most competitive provider can quickly prove to be a very lucrative process indeed.

It is equally important to appreciate that the business owner does not succumb to the trap of assuming that all business financing methods are inherently wrong or usurious and must therefore be avoided outright as they can also provide benefits.

A loan is often decried within the business community, typically regarded as a necessary evil and not much else. However, a loan plays an important role in the expansion process of a business as it can help provide the company with the requisite working capital reserves to allow for further major developments of the business to take place.

In addition, if the business is in a position to ensure that it adheres to the terms of the repayment schedule specified by the lender scrupulously and to the letter, then the credit rating of the business will be significantly increased which in turn will allow for them to be able to secure further credit in the future and more easily.

Furthermore, the interest repaid on a business loan can also be treated as tax deductible, as it is an expense that has been wholly and entirely incurred in the execution of the course of business. Of course it is strongly recommended that the business owner who is considering taking out a loan consults a tax attorney to ensure that they are utilising the savings properly.

5 Ways the Current Market is Affecting Commercial Financing

These are unprecedented times. No one has ever seen anything like this in the real estate world. It is now safe to say the residential bubble has not only burst, but has burst atomic style.

The residential real estate market has been hit the hardest with homes in certain areas selling below 50% of their appraised value only a year ago. The swing in home values have sent banks, non-bank lenders, insurance companies, and investors running frantically desperately searching for any last ditch effort to avoid shutting their doors.

commercial financing has historically been approved based off of the cash flow of the property or operating company located at the property, but many of the consequences of the residential market are seeping quickly into the commercial market.

While it would be absurd to say that these are the only 5 things that are affecting commercial financing, they are 5 of the most significant consequences of the real estate market meltdown:

1. Stricter underwriting guidelines imposed by banks and non-bank lenders

2. No concrete financing programs

3. Rising interest rates

4. Business deposit relationships being required

5. Longer approval process and loan closing time frames

These 5 areas of change will affect the way borrowers, sellers, brokers, and lenders should look at obtaining commercial financing. To disregard any of these things would be poor judgment on the end of any of these parties and inevitably cause further problems.

No one knows how long this crisis will last, and it is expected to be awhile before lenders are comfortable with stable real estate values and financially stable borrowers, so it would be wise to take these 5 changes into consideration when seeking commercial financing.

Commercial Finance – Hard Money

The Merriam – Webster Online Dictionary defines hard as:

1 a: not easily penetrated: not easily yielding to pressure b of cheese: not capable of being spread: very firm.

2 a: of liquor (1): having a harsh or acid taste (2): strongly alcoholic b: characterized by the presence of salts (as of calcium or magnesium) that prevents lathering with soap i.e.hard water.

3 a: of or relating to radiation of relatively high penetrating power: having high energy hard X rays b: having or producing relatively great photographic contrast i.e.a hard negative.

4 a: metallic as distinct from paper hard money b: of currency: convertible into gold: stable in value c: usable as currency i.e.paid in hard cash. d: of currency: readily acceptable in international trade e: being high and firm i.e. hard prices.

5 a: firmly and closely twisted i.e. hard yarns. b: having a smooth close napless finish i.e. a hard worsted.

6 a: physically fit i.e. in good hard condition. b: resistant to stress or disease c: free of weakness or defects.

7 a (1): firm definite i.e.reached a hard agreement. (2): not speculative or conjectural: factual hard evidence (3): important or informative rather than sensational or entertaining i.e. hard news. b: close searching i.e. gave a hard look. c: free from sentimentality or illusion: realistic i.e. good hard sense. d: lacking in responsiveness: obdurate unfeeling i.e. a hard heart.

8 a (1): difficult to bear or endure i.e.hard luck or hard times. (2): oppressive inequitable i.e.sales taxes are hard on the poor.

9 a: characterized by sharp or harsh outline, rigid execution, and stiff drawing b: sharply defined: stark i.e. hard shadows.

10 a (1): difficult to accomplish or resolve: troublesome i.e. hard problems.

As used in this article, hard money is intended to convey the idea that because of the current economic conditions, many financing needs will be more difficult to accomplish. They will require great exertion and effort to overcome the economic obstacles of the current economy. Compared to 2006 and 2007, periods of relatively easy money, to obtain financing today you will have to have firm, definite facts to support your financing needs. And the cost of money will be more difficult to bear. Hard money is harder to find, harder to obtain and harder to repay. Nevertheless, hard money may be an economic necessity as a means to an end to grow a business or complete a real estate transaction.

Why is 2008 a time of hard money? This is a difficult question to answer. If you ask 3 experts you probably will get three different answers. It may be the economic equivalent of The Perfect Storm- a True Story of Men against the Sea. The phrase “perfect storm” refers to the simultaneous occurrence of events which, taken individually, probably would be far less powerful than the result of their rare combination. These occurrences are rare by their very nature, so that even a slight change in any one event contributing to the perfect storm would lessen its overall impact. The stock market crash of 1929 and following depression exemplifies a perfect storm of economic consequence.

What are these events today? 1) The Mortgage Melt-down. Major financial institutions in the United States are incurring billions of dollars in losses due to the loss in valuation of their investments in mortgage securities. The consequence for borrowers is that these institutions are less inclined to take risks when loaning money for fear of additional losses. And their regulators are demanding that regulated lenders raise their credit standards for borrowers to qualify for a loan. 2) The devaluation of the American dollar versus other world currencies. The U.S. government is spending ginormous amounts of money in excess of what it collect in revenue due to the political compulsion to spend taxpayers’ money, the war in Iraq, Hurricane Katrina (and other natural disasters) and the war on terrorism. This makes our currency less valuable. It makes importing to the U.S. more expensive. The American people have less money to spend on goods and services, and their money buys less than it did a year ago because prices of necessities such as gasoline are higher. 3) The current tendency of Federal and State governments to reduce funding for social services, health services and education because of inadequate revenues; this hurts individuals and businesses who have less money to spend on products and services which creates additional drags on our economy. 4) The diminishing value of residential real estate all across the United States. This is related to the mortgage meltdown and the fact that many people incurred debts that they cannot repay. The real causes of these events are complicated and beyond the scope of this article. Suffice it to say that these are hard times and hard times create needs for hard money loans.

What exactly is hard money? Here are seven examples:

1) A commercial real estate loan where the borrower receives funds based on the value of the property, usually 50% or less, at an interest rate higher than a bank would charge. This is the most commonly understood type of hard money. In this financing, neither the income from the property or the borrower demonstrably supports the repayment of the loan.

2) A real estate loan to buy a residential property where the borrower cannot prove their income. This may be accomplished with financing from a seller, the only party willing to take the risk of non-payment.

3) A small junior lien on income producing commercial real estate where the first lien is very large. For example, a million dollar second lien behind a ten million dollar first lien. Most lenders simply do not want to consider a loan of this type because of the potential liability for repayment of the first lien. It is ten times the risk of the secondary loan.

4) Most loans to people with less than excellent credit. Many loans are based on credit scoring. If you do not have a credit score that is high enough for the lender’s requirement, you simply do not get their loan and you may or may not be able to find a hard money loan to accomplish your objective.

5) Accounts receivable financing to construction contractors, medical providers and sellers of agricultural products. Most factors do not offer to these sectors of the economy because of the risks and complexities that are involved.

6) Purchase order financing for items with gross margins less than twenty percent. The twenty percent margin is a benchmark for sufficient profitability in a transaction to pay all financing costs and create profits for the business after all costs are paid. During hard economic times margins are squeezed. It is a vicious cycle.

7) Loans to businesses that are particularly negatively affected by the current economy. For instance, a loan to build a new lumberyard is impacted by the downturn in new real estate construction and a lower need for lumber. Most banks would simply decline to consider such a loan. The same is true for developers seeking to build new housing tracts or office building developments. This is not a good time to try to start a new mortgage brokerage company; although it may be a good time to be a hard money lender provided that you are very, very careful in assessing your transactional risks.

What do all of these situations have in common? In times of easy money these situations would be less costly to finance and more likely to receive funding. Today, the lender’s answer to your request for funding is more likely to be a polite but strong “no way”. Many lenders have effectively (if not actually) shut their doors. Many lenders will simply decline to lend on hotels/motels, gas stations, owner/user properties, properties with any environmental issues. Borrowers who do not have FICO credit scores above 680, with substantial net worth and income will find it is very difficult to obtain many types of loans. Fortunately, the door for accounts receivable financing is still wide open.

The bottom line: Hard times in our economy will tend to force more individuals and businesses to borrow hard money- if they are able to get any money at all. Commercial financing with hard money will tend to grow as traditional sources of financing from banks and institutional lenders simply will not be available.

When Is A Commercial Hard Money Loan Appropriate For A Business?

A commercial hard money loan is a non-conventional commercial real estate loan that is NOT made by a traditional bank. This type of commercial financing has been in use for over 50 years. Such loans usually have a first lien on commercial property. If a hard money loan has a secondary lien, it is known as mezzanine financing.

Commercial hard money loans are typically completed more quickly than a traditional commercial loan. The primary rationale for a small business considering a commercial hard money loan is that traditional commercial financing options are not viable. There are three financing options for most commercial real estate scenarios: traditional banks, intermediate lenders and hard money lenders.

In those situations where traditional banks and intermediate lenders both say “NO”, it then makes good business sense to explore under what terms a hard money commercial loan might be available. Many viable small business projects can be funded ONLY via a hard money lender. Before accepting “NO” from the traditional banks and intermediate lenders as the “FINAL ANSWER”, a prudent small business borrower should determine if a hard money lender will say “YES”.

Compared to traditional bank business loans, commercial hard money loans will generally involve a higher interest rate (prevailing range of prime rate plus 4-8% for typical scenarios), higher fees and shorter-term financing (one to three years). However, because many hard money loans offer interest only terms, the payments can be lower than a fully-amortized loan with a lower interest rate.

Several common commercial financing scenarios using hard money loans are described below.

Scenario # 1: Low Credit Scores

Most traditional commercial loans have very strict standards for acceptable credit scores by the guarantors for a commercial real estate loan. Hard money loans are much more flexible and low credit scores are acceptable.

Scenario # 2: Need to Obtain Commercial Financing Quickly

Traditional commercial loans will normally require several months to complete. Hard money loans can be obtained within a few days in some situations. This difference will be critical if commercial financing is required within a short time frame.

Scenario # 3: Aggressive Loan-to-Value Ratios (including construction)

If commercial borrowers want to purchase, refinance or build a commercial property using a higher loan-to-value (LTV) than permitted with a traditional commercial real estate loan, a hard money loan should be considered. In some cases up to 100% acquisition financing can be arranged.

Scenario # 4: Special Small Business Situations Not Easily Understood by Traditional Banks

Foreclosure
Bankruptcy
Special Purpose Properties
Tax Liens
Losses
Negative Net Worth
Less than one year in business
Environmental Requirements

Commercial Financing For Special Purpose Business Properties

Funeral homes, assisted living facilities, campgrounds and other special purpose properties represent one of the most difficult commercial loan situations which will be confronted by a business owner. Unique properties are not easily understood by traditional lenders, so the most common solution involves finding a non-traditional lender for funeral home financing as well as commercial financing for other special purpose properties. Such non-traditional lenders will be appropriate for purchase situations as well as refinancing and new construction.

KEY REASONS FOR DIFFICULTY IN ARRANGING COMMERCIAL FINANCING FOR SPECIAL PURPOSE PROPERTIES

(1) By definition special purpose properties are not similar to other commercial properties. This makes many lenders uncomfortable due to the likely difficulty of finding another owner for a unique commercial property should it be necessary due to a loan default.

(2) For funeral homes and many other special purpose commercial properties, most of the business value is represented by non-real estate assets. With commercial lenders that focus on commercial real estate loans, it is almost impossible to get a loan based on the real estate value AND the business value. For example, it is not uncommon to have a situation in which the real estate for a funeral home is valued at less than one million dollars while the overall business value is in excess of three million dollars.

(3) Because commercial financing is so difficult to arrange for special purpose properties such as funeral homes, assisted living facilities and campgrounds, sellers of such properties are generally willing to provide substantial seller financing to assist the buyer in acquiring the business. However, many traditional lenders do not recognize or accept seller financing as a means of reducing down payment requirements for special purpose properties.

(4) Many lenders simply do not understand the business complexities associated with a special purpose property. As a result, it is not uncommon for these lenders to attach onerous and expensive requirements such as business plans and environmental reviews. In most cases such lenders do not even want to make the business loan but will use undesirable loan requirements as a means of appearing to approve a loan when in fact they have disapproved the loan by adding commercial loan terms that they do not expect a commercial borrower to accept.

COMMERCIAL LOAN SOLUTIONS FOR SPECIAL PURPOSE PROPERTIES

For a business borrower facing the situation described above, the highest priority should be to locate a non-traditional commercial lender that engages in the following commercial loan practices:

(1) Openly welcomes special purpose properties and routinely finances such properties.

(2) Provides commercial financing for both the business and real estate.

(3) Accepts substantial seller financing.

(4) Does not add special requirements to the business loan for special purpose commercial properties.

(5) Has a history of making loans for the specific type of property under consideration.

(6) Can accommodate both small and large commercial loans for special purpose commercial properties (for example, loans as small as $100,000 and loans as large as $5 million or higher)

More Help For Avoiding Fake Commercial Financing Articles

In a recent working capital financing article, we described the increasing use of fake content about commercial loans throughout the internet community. In the earlier AEX Commercial Financing report, we provided practical suggestions for avoiding publishers of fictitious information about business cash advances and commercial mortgages. We are providing more detailed suggestions for avoiding this growing problem in the discussion below.

The use of reputable publication sites is one of the most effective ways to avoid fake commercial financing articles. These trusted sites will employ their best efforts to eliminate articles for which the author does not have ownership rights. The best of these high-quality and responsible sites will require review of articles by a human editor prior to publication. Most of these websites will provide detailed contact information for the author. Some especially-thorough sites require authors to submit sample articles to demonstrate effective writing capabilities before publication.

For articles not published on an established site, some detective work might be necessary. The absence of detailed contact information can indicate that the site is more interested in having visitors click on advertising links rather than facilitating getting in touch with someone associated with the website. The worst offenders will typically steal content previously published on trusted sites such as those described above and remove the resource box (thus eliminating contact information for the author).

The best indicator of questionable content on these ethically-challenged sites is often the prominence of articles which do not always make sense if you read them closely. This occurs because many such sites use software to scour the internet and to publish an article based on some random combination from a variety of sources. The resulting content provides selected keywords which is designed to bring search engine traffic even if the content itself does not make much sense. For these questionable sites, unintelligible articles often mean that a visitor is more likely to click on a paid link that appears to be relevant to their own keyword search. In other words, most of these low-value sites actually prefer that the content itself will not make sense to a reader because their game plan depends on visitors clicking on paid advertising links.

There are currently many commercial financing sites which provide only their contact information along with an article originally published elsewhere by an expert for commercial loans. These sites will remove the legitimate resource box for the actual article and represent the work as their own. There are several strategies which can help with this situation.

First, use a prominent search engine to perform your own review of other business financing articles published by the author. If articles can only be found on the one website, at a minimum this suggests that the author is certainly not a commercial loans expert. This is in itself an important finding, because business cash advances and commercial real estate loans are more complex than they might appear, and most business owners simply cannot afford to work with inexperienced working capital advisors.

Second, a detailed conversation with the indicated author will be informative. Ask about where other small business loans articles they have published can be found on the internet. The critical importance of such interactive discussions between business financing advisors and business borrowers cannot be emphasized enough since business owners will eventually need very personalized help with their working capital cash management. The likelihood of getting such individualized attention from this particular source will be obvious after a candid discussion.

Third, we previously recommended the use of established article websites. Many of these are now providing an author widget which is very helpful in providing a practical overview of work published by a specific author. Those sites without such a widget are likely to provide a summary index of articles by each author. The widgets or other summaries will quickly demonstrate how many articles a particular author has written. An author well-versed in commercial financing is likely to have published articles about topics such as credit card processing, SBA loans and business opportunity financing. It is suggested that commercial borrowers review a few pertinent articles in their entirety to help determine whether the author is a commercial loan expert that appears to be capable of helping with their specific business financing situation.

Commercial Finance – Available For a Host of Needs!

If you have been on the lookout for a loan to start a new business, or expand existing business, you can avail commercial finance. There are many lenders for commercial finance. They can provide a suitable loan that suits your personal needs. This is the easiest way to raise finance to start your own business, purchase of machinery for industrial units or buy land to set up a plant, move your business from one location to another. These loans can be used for any purpose.

Commercial finance lenders will provide a loan that is tailored for your small or medium business. Even borrowers with a bad credit score can avail this type of loan. Lenders give due thought to the size of the business and business plan, before lending a loan. Most of the financiers offer the following benefits:

o Low APR’s and flexible repayment terms

o Loans approved for all types of credit scorers

o No proof of income required

o Quick decision and immediate approval

o Fast Free online commercial mortgage quotes

It can be a tedious task running around to get commercial property loan approved. If you are faced with an urgent requirement, you may under extreme pressure. Since commercial finance involves a huge amount of money, the criteria for approval of this type of loan are also different. It also differs from one lender to another. If you wish to get a loan approved fast, you must have last 3 years financial statements, last few tax returns, a business plan. This will play a crucial role in convincing a lender to approve loans.

Lenders for commercial finance can approve a loan which suits the personal needs of the borrower. Borrowers can also look forward to favourable deals on loans. Those who face an urgent requirement can avail loans online. The loans will be approved quickly. To avail this kind of loan, borrowers need to furnish appropriate documents. Mortgage brokers can help avail a loan quickly. They can also guide a borrower in creating documents to support the application. Besides this, they can also advise on how to avail loans. Qualified professionals can help a borrower avail loans quickly.

You can achieve any of your business needs by availing this type of loan. The financial experts can guide a borrower to avail a suitable loan. The loan can be used to buy any existing business, commercial property to let, residential or real estate purposes or buy commercial premises for the business. The brokers have ample experience in providing suitable loan to various borrowers. It is certainly not difficult to fulfil your business needs by availing this type of loan.

Commercial Financing for Special Purpose Business Properties

Funeral homes, assisted living facilities, campgrounds and other special purpose properties represent one of the most difficult commercial loan situations which will be confronted by a business owner. Unique properties are not easily understood by traditional lenders, so the most common solution involves finding a non-traditional lender for funeral home financing as well as commercial financing for other special purpose properties. Such non-traditional lenders will be appropriate for purchase situations as well as refinancing and new construction.

KEY REASONS FOR DIFFICULTY IN ARRANGING COMMERCIAL FINANCING FOR SPECIAL PURPOSE PROPERTIES

(1) By definition special purpose properties are not similar to other commercial properties. This makes many lenders uncomfortable due to the likely difficulty of finding another owner for a unique commercial property should it be necessary due to a loan default.

(2) For funeral homes and many other special purpose commercial properties, most of the business value is represented by non-real estate assets. With traditional commercial lenders that focus on commercial real estate loans, it is almost impossible to get a loan based on the real estate value and the business value. For example, it is not uncommon to have a situation in which the real estate for a funeral home is valued at less than one million dollars while the overall business value is in excess of three million dollars.

(3) Because commercial financing is so difficult to arrange for special purpose properties such as funeral homes, assisted living facilities and campgrounds, sellers of such properties are generally willing to provide substantial seller financing to assist the buyer in acquiring the business. However, many traditional lenders do not recognize or accept seller financing as a means of reducing down payment requirements for special purpose properties.

(4) Many lenders simply do not understand the business complexities associated with a special purpose property. As a result, it is not uncommon for these lenders to attach onerous and expensive requirements such as business plans and environmental reviews. In most cases such lenders do not even want to make the business loan but will use undesirable loan requirements as a means of appearing to approve a loan when in fact they have disapproved the loan by adding commercial loan terms that they do not expect a commercial borrower to accept.

COMMERCIAL LOAN SOLUTIONS FOR SPECIAL PURPOSE PROPERTIES

For a business borrower facing the situation described above, the highest priority should be to locate a non-traditional commercial lender that engages in the following commercial loan practices:

(1) Openly welcomes special purpose properties and routinely finances such properties.

(2) Provides commercial financing for both the business and real estate.

(3) Accepts substantial seller financing.

(4) Does not add special requirements to the business loan for special purpose commercial properties.

(5) Has a history of making loans for the specific type of property under consideration.

(6) Can accommodate both small and large commercial loans for special purpose commercial properties (for example, loans as small as $100,000 and loans as large as $5 million or higher).

Business Finance Funding Advice and Commercial Financing Help

The Working Capital Journal is one of several commercial financing resources which should be reviewed regularly by small business owners to assist in keeping up with the imposing difficulties posed by rapid changes in the business finance funding climate. As noted below, there have been some surprising actions taken by lenders as a direct result of recent financial uncertainties. The increasingly complex and confusing environment for working capital finance is likely to produce several unexpected challenges for commercial borrowers.

The working capital finance industry has primarily been operating on a regional and local basis for many years. In response to cost-cutting that has permeated many industries, there has been a consolidation that has resulted in fewer effective commercial lenders throughout the United States. Most business owners have been understandably confused about what this might mean for the future of their commercial financing efforts, especially because this has happened in a relatively short period of time.

Of course, for some time there have been ongoing complex problems for commercial borrowers to avoid when seeking commercial loans. But what has produced a new set of business finance funding problems is that we appear to be entering a period which will be characterized by even more uncertainties in the economy. Previous rules and standards for commercial financing and working capital finance are likely to increasingly change quickly, with little advance notice by business lenders.

Business owners should make an extended effort to understand what is happening and what to do about it due to this realization that substantial changes are likely throughout the United States in the near future for commercial finance funding. At the forefront of these efforts should be a review of what actions commercial lenders have already taken in recent months. The Working Capital Journal is one prominent example of a free public resource that will facilitate a better understanding of the responses by business lenders to recent economic circumstances.

By publicizing actions taken by commercial lenders, this will contribute to these two goals, both of which are likely to be helpful to typical business owners: (1) To highlight controversial bank-lender tactics with a view toward reducing or eliminating questionable lending practices. (2) To help business owners prepare for commercial finance funding changes. To assist in this effort, sources such as The Working Capital Journal are encouraging business owners to report and describe their own experiences so that they can be shared with a broader audience that might benefit from the information. Some of the most significant commercial financing changes reported so far by commercial borrowers involve working capital loans, commercial construction financing and credit card financing. A notable situation of concern is that predatory lending practices by credit card issuers have been reported by many business owners. Some specific businesses such as restaurants are having an especially difficult time in surviving recently because they have been excluded from obtaining any new business financing by many banks.

One of the few recent bright spots in business finance funding, as noted in The Working Capital Journal, has been the continuing ability of business owners to obtain working capital quickly by business cash advance programs. For most businesses accepting credit cards, this commercial financing approach should be actively considered. Business cash advances are literally saving the day for many small business owners because most banks appear to be doing a terrible job of providing commercial loans and other working capital finance help in the midst of recent financial and economic uncertainties. For example, as noted above, restaurants are virtually unable to currently obtain commercial finance funding from most banks. Fortunately, restaurants accepting credit cards are in a good position to obtain needed cash from credit card receivables financing and merchant cash advances.

What Should A Commercial Borrower Do If The Bank Declines Their Commercial Mortgage Application?

Many commercial projects are too entrepreneurial for mainstream commercial lenders. In these situations it is not unusual for commercial borrowers to be declined for a commercial mortgage loan by a traditional bank. Commercial borrowers are likely to be confused when they are turned down and will be unsure as to why it happened and what to do next. This article highlights the five main reasons that banks decline commercial mortgage loan applications. For each of the reasons that a bank might decline a commercial real estate loan, a strategy is provided for converting the declined loan into an approved commercial mortgage. An appropriate (but lengthy) subtitle for the article is How to Convert Declined Commercial Mortgage Loans into Approved Loans: The Top 5 Reasons that Banks Decline Commercial Mortgage Loan Applications and The Top 5 Strategies for Converting A Declined Loan into an Approved Commercial Mortgage”.

Reason # 1:
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 loan underwriters look at tax returns, there are many other possibilities which produce a similar result.

Strategy # 1:
Business loan borrowers will NEVER have Reason Number 1 to worry about if they are applying for a “Stated Income” commercial real estate loan. Very few traditional banks use Stated Income (no tax returns, no income verification) for a commercial mortgage. Commercial borrowers should seek out lenders using Stated Income Commercial Loans and “Limited Documentation Requirements”. This strategy will not work for all commercial mortgages since there is a maximum loan amount of $2 million for most Stated Income Commercial Mortgage Programs.

Reason # 2:
A bank’s loan officer or loan underwriter is not satisfied that the business plan provided by the commercial borrower supports the requested loan.

Strategy # 2:
Most commercial borrowers will benefit directly from dealing with a commercial lender that does not require a business plan due to the following major benefits:

(1) Reduce commercial mortgage costs by thousands of dollars. A common range for an average business plan (prepared to typical bank specifications) would be $5,000 to $10,000.

(2) Reduce mortgage closing time by several months. Business plans can be prepared before or after applying for a loan, but either way the net extra time required will probably be 1-2 months or more.

(3) If the lender does not require a business plan, there is one less item standing between the commercial borrower and their approved loan.

Reason # 3:
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 # 3:
Commercial mortgage 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 and business assets.

Reason # 4:
The bank does not generally make business loans for the type of business involved or imposes special requirements that make the loan impractical for the commercial borrower. Fewer and fewer banks are making loans to bar/restaurant properties. Similarly, auto service businesses are frequently given unnecessary (and expensive) environmental reporting requirements. There are many “special purpose” properties such as nursing homes, assisted living facilities, churches, RV parks, marinas, golf courses, funeral homes, bed and breakfast, day care centers, and car washes that most traditional banks will not include in their business lending portfolio.

Strategy # 4:
For most business borrowers that can get approved at a traditional bank, there are better options available elsewhere. And “better options” are clearly available ONLY elsewhere when the bank won’t make the business loan in the first place! There are very capable commercial lenders that are interested in unique or special purpose properties.

Reason # 5:
When a business is refinancing their current commercial mortgage and wants to get a significant amount of cash out for various uses, it is not unusual for the bank to limit the amount of cash to amounts as small as $100,000. Even though the bank might make the loan, if they won’t provide the amount of cash needed by the commercial borrower, this is equivalent to declining the loan.

Strategy # 5:
As mentioned in Strategy Number 4, there are better options available elsewhere! 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 unrestricted cash out of a commercial refinancing, i.e. more cash out and no restrictions on what they do with it.