4 Reasons Commercial Loan Requests Get Rejected — and What You Can Do to Avoid Them

By: Zack North

Before you apply for a commercial loan, it’s important that you understand the eligibility guidelines set forth by your lender.

Unfortunately, lenders don’t always make this information readily available. Therefore, it can be valuable to learn from the experiences of others who have sought commercial mortgage financing. That way, you can avoid certain mistakes and put yourself in a better position to get your request approved.

Here are 4 of the most common reasons why prospective borrowers face rejection for their commercial loan request:

Reason #1: Inconsistent or Insufficient Paperwork

Basic loan application errors could derail your financing request before you ever speak with a loan officer.

Other inconsistencies or missing documentation during the underwriting stage of the commercial loan transaction process can also keep you from getting approved.

The amount of documentation traditional lenders require can be a stumbling block for prospective borrowers.  Some are simply unable to provide documentation like tax returns – others believe that the information required does not tell the whole story when it comes to their credit-worthiness.

If you expect documentation to be an issue for your loan request, you may want to consider working with an alternative lender.

These lenders can offer reduced documentation or even stated income loans. For instance, Commercial Direct, a division of Silver Hill Funding, LLC, provides a number of alternatives for investors and business owners.

One such alternative, our Bank Statement Program, gives business owners the ability to submit 12 consecutive months of business bank statements in lieu of tax returns.  Many consider this to be a more streamlined approach to securing commercial financing.

Reason #2: Loan Amount or Purpose

Borrowers who seek loans of under $500,000 often experience difficulty working with large financial institutions.  These lenders find that it takes roughly the same amount of time and manpower to close small and large loans, so they focus primarily on the larger-scale transactions.

Lenders can also deny a loan request because of the stated use for the funds.

This is very common in cash-out refinances, where lenders regularly restrict both the amount of cash a borrower can access and the ways in which it can be used.

Lenders that specialize in small-balance commercial mortgages are less likely to be as stringent in these areas. Common loan limits for small-balance lenders range from around $250,000 to $2 million, though solutions do exist for smaller loan amounts.

Reason #3: Credit Score

One of the most important factors lenders consider when reviewing a loan request is the prospective borrower’s credit score.  Most lenders – even the alternative ones – have little flexibility when it comes to their minimum credit score requirement.

If you are worried that your credit score will keep you from securing commercial mortgage financing, take steps now to improve your standing, such as paying down bills and debts and making future payments on time.

You won’t be able to significantly raise your score overnight, but any improvement you’re able to make now will make a big difference when you apply for your commercial loan.

Reason #4: Your Business Plan

If your business plan doesn’t back up the financial request that you’re making, a lender will likely deny your application.

Lenders want to feel confident about your ability to repay the loan. A well-written and logical business plan goes a long way when building that trust.

If you are looking for short-term financing, include an exit strategy in your business plan that describes both how you will pay off the loan and what you plan to do with the property in the future.

Other Reasons for Rejection:

Unfortunately, there are some types of loan rejections that borrowers can do little to overcome.

For example, the subject property in a prospective borrower’s loan request may be located in a state where a lender does not do business.

Lenders also limit the types of properties on which they lend.  A conservative institution may be less likely to finance automotive properties because of the inherent environmental risk.  In the same way, a lender may refuse to lend on restaurant and bar properties because of that industry’s high turnover rate.

Instead of adjusting their loan request, borrowers in these cases should expand their search to include a wider range of lender options.

Don’t Miss this!

It’s important to remember that a lender’s rejection is not a referendum on your business or investment goals.

All it means is that your request did not fit the lender’s specific guidelines.  The good news is that there are a wide range of lender options in the market today – including many that specialize in helping borrowers who struggle to work with banks and other traditional lenders.

Commercial Direct could be that solution for you.  The only way to know for sure is to connect with one of our expert loan officers and discuss your opportunities.  You can get started right now by giving us some basic info regarding your loan request.

Author: Zack North

Zack North is the Director of Marketing for Commercial Direct.  As a regular contributor to a number of top industry publications, Zack enjoys writing about topics that help investors and business owners approach commercial mortgage financing with confidence.

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