Commercial Mortgage Loan Options - Business Loan Problems

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.

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 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 described do not involve unusual issues. It is likely that two or more of the reasons will be applicable for many commercial loan situations.

Commercial Mortgage Rejections: (1) Special Purpose Properties

Reason Number One for business loan rejections: The lender does not make commercial mortgage loans for the type of business financing involved or imposes special covenants that make the commercial real estate loan difficult for the business owner. In a typical example, fewer commercial banks are offering business 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 declined commercial mortgage into an approved commercial real estate loan: For most business borrowers, there are prudent business loan options beyond traditional commercial bank 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.

Business Loan Disapprovals: (2) Tax Returns Required

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.

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 Rejections: (3) Cash Out 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 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 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 Loan Disapprovals: (5) Required Business Plan

Reason Number Five for business loan rejections: A bank's loan underwriter or loan officer does not feel that the business plan submitted by the borrower supports the required commercial mortgage 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) 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 commercial lender does not need a formal business plan, there is one less condition to meet for an approved commercial mortgage.

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