Business Loan Strategies – 12 Problems to Avoid

This article describes 12 recurring business loan problems that commercial borrowers and their advisors need to anticipate before it is too late. The following business loan problems are common in traditional bank commercial real estate loans and should be avoided if feasible (special circumstances will periodically make some of these business loan terms unavoidable).

BUSINESS LOAN PROBLEM # 1:
Tax Returns versus Stated Income

Most traditional banks will require several years of tax returns in order to qualify for a commercial real estate loan. The alternative is to use a Stated Income lender that does not verify personal income or assets for a business loan. Many borrowers will simply not qualify for a commercial mortgage loan if tax returns are used due to high business expenses (and low net income). Many lenders using tax returns will also continue to verify income after the business loan closes. Stated Income lenders will not engage in this practice.

BUSINESS LOAN PROBLEM # 2:
Special Purpose Properties

It is becoming increasingly difficult to get business loans for special purpose properties. Properties that do not fall in the categories of apartments or retail/office buildings are often placed in this special purpose classification. This means that business loans for commercial properties such as restaurants/bars and auto service businesses are frequently hard to find. Commercial financing will be even more difficult to locate for such specialized properties as churches, funeral homes, nursing homes and assisted living facilities.

BUSINESS LOAN PROBLEM # 3:
Recall/balloon features

These business loan terms are used by many banks to effectively shorten most business loans to 3-7 years.

BUSINESS LOAN PROBLEM # 4:
Short-term loans (less than fifteen years)

15-40 year business loans without recall/balloon features are available.

BUSINESS LOAN PROBLEM # 5:
Up-front Commitment fees

Under most circumstances, commercial borrowers should not pay such a fee. Please note that processing/retainer fees are not included in this discussion of commitment fees. Processing/retainer fees should be viewed as an acceptable and standard business practice when dealing with many business loan situations.

BUSINESS LOAN PROBLEM # 6:
Business Plans

Under most circumstances, commercial borrowers should not use a lender that requires a business plan.

BUSINESS LOAN PROBLEM # 7:
Cross-collateralization

Commercial borrowers should not be required to use their personal assets as collateral for a business loan.

BUSINESS LOAN PROBLEM # 8:
Sourcing and seasoning assets. Seasoning of ownership.

This particular problem will not be relevant to all business borrowers. However, if it is relevant, commercial borrowers should seek out a lender without sourcing and seasoning requirements or limitations. Most banks have strict guidelines for sourcing and seasoning of assets or ownership to qualify for commercial real estate loans. For a purchase, commercial lenders will frequently want documentation about where the down payment is coming from (sourcing). Commercial lenders will also frequently have very specific requirements stipulating that the funds for a business loan down payment must have been in a specific account for a specific period of time, often 3-6 months or longer (seasoning). Seasoning of ownership is similar to seasoning of funds, except this requirement involves the minimum time someone has owned a commercial property before they can refinance the property.

BUSINESS LOAN PROBLEM # 9:
Requirement to sign IRS Form 4506

IRS Form 4506 authorizes the lender to obtain a borrower’s tax returns directly from the IRS. This form is routinely required by most traditional banks and many other commercial lenders for a business loan. Commercial borrowers using a Stated Income lender with limited documentation requirements for a business loan will avoid this requirement.

BUSINESS LOAN PROBLEM # 10:
Debt Service Coverage Ratio (DSCR) in excess of 1.2 for a business loan

The most flexible approach to DSCR for a commercial property loan will require a DSCR in the range of 1 to 1.2, with exceptions permitting a DSCR less than 1.

BUSINESS LOAN PROBLEM # 11:
Minimum commercial property loan size that is too high for current commercial mortgage needs.

It is not unusual to encounter a minimum business loan requirement of $500,000 to $1,000,000.

BUSINESS LOAN PROBLEM # 12:
Excessive length of the commercial real estate loan process

Many traditional banks require three to nine months to close a commercial mortgage. A more action-oriented commercial lender will close a commercial mortgage loan in 45 to 60 days.

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