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.

The requirements involving business plans and tax returns will frequently be relevant to almost all financing. 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 five major issues described here are very common problems encountered by business owners. It is likely that two or three of the reasons described will be important for typical commercial real estate loans.

(1) Special Purpose Commercial Property. The first key reason for rejection of business loans will be due to lack of lender interest for specific business categories. 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. When a traditional bank cannot make a commercial loan, the best loan options will probably be found from a commercial lender considered to be non-traditional.

(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. Because the normal maximum stated income loan is two million dollars, this particular solution cannot be used in all cases.

(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. Many commercial lenders will severely restrict how much cash can be obtained as well as what can be done with the money. Borrowers should realize that the bank is essentially disapproving the loan when they refuse to provide adequate cash to the business owner.

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.

Strategy number five for converting the disapproved business loan into an approved commercial mortgage loan is to save money and avoid possible delays by working with a lender that does not require a business plan. 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. Business plan preparation is likely to take 1-2 months or more.

(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.