By Stephen Bush
Traditional banks serve a very important role in the North American economy. Nevertheless, when it comes to a business loan, there are many reasons that small business owners should not always use a traditional bank. There are not just one or two major reasons to obtain a small business loan from another source. As you will see below, there are over a dozen compelling reasons to consider a source other than a traditional bank for a small business loan. For most small business owners, five to ten of these reasons are likely to be applicable to them.
With many small business loan borrowers, banks have already declined their loan application. That particular compelling reason to use a source other than a traditional bank (being declined by a traditional bank) does not even appear on the list below.
Here are 14 compelling reasons a small business owner might not go to a traditional bank for a commercial real estate loan. The compelling reasons shown below also indicate that for business borrowers that can get approved at a traditional bank, there might be better options available elsewhere.
Reason # 1:
Minimum commercial real estate loan for many banks is $250,000 or more. With non-bank small business lenders, the typical minimum commercial loan amount is $100,000.
Reason # 2:
Most banks charge an up-front commitment fee. Most non-bank small business lenders do not charge an up-front commitment fee for a commercial mortgage.
Reason # 3:
Most banks will severely limit the amount of cash a business borrower can get when refinancing a commercial mortgage. When a borrower is refinancing their business property with non-bank small business lenders, they can typically get up to $1,000,000 in cash.
Reason # 4:
Most banks are reducing their commercial real estate loan interest in properties such as bars/restaurants, auto service businesses and funeral homes. Non-bank small business lenders are very interested in these business categories (and many other special purpose properties) for a commercial mortgage.
Reason # 5:
Most banks will require business plans for a commercial mortgage. The cost to provide this is usually several thousand dollars. Non-bank small business lenders typically do not require business plans as part of their underwriting process for a commercial real estate loan.
Reason # 6:
Most banks will require tax returns for a commercial mortgage. Non-bank small business lenders do not require tax returns or any income verification for a Stated Income commercial real estate loan. Many banks not requesting tax returns will ask borrowers to sign IRS Form 4506 (which authorizes the lender to obtain tax returns directly from the IRS). Non-bank small business lenders typically do not request borrowers to sign this form.
Reason # 7:
Most banks will require cross collateralization of personal property for a commercial real estate loan. Most non-bank small business lenders do not require cross collateralization of personal property for a commercial mortgage.
Reason # 8:
Most banks will require balloon payments or the loan will be subject to recall after periods as short as 3-5 years for a commercial mortgage. With a commercial real estate loan via typical non-bank small business lenders, all properties are eligible for 25-year loans and some up to 40 years.
Reason # 9:
Most banks will not permit seller seconds or secondary financing for a commercial real estate loan. With many non-bank small business lenders, if the business borrower uses a seller second or other secondary financing for a commercial mortgage, the business borrower can obtain a loan with a CLTV up to 95% of the property value.
Reason # 10:
Most banks require income verification or audits even after the commercial real estate loan closes. Non-bank small business lenders do not verify income either before or after a commercial loan closes with a Stated Income Business Loan Program.
Reason # 11:
Most banks have strict guidelines for “sourcing” or “seasoning” of assets or ownership to qualify for a commercial mortgage. Most non-bank small business lenders do not have any requirements or limitations involving sourcing/seasoning of funds or seasoning of ownership.
Reason # 12:
Very few banks offer an assumable commercial real estate loan. Typical non-bank small business lenders have an Assumable Commercial Loan Program which includes loan amounts up to $1 million.
Reason # 13:
With most banks, a typical commercial real estate loan will require 3 to 9 months to close. At typical non-bank small business lenders, most commercial mortgage loans close in 45 to 55 days.
Reason # 14:
Very few banks use Stated Income (no tax returns, no income verification) for a commercial real estate loan. Non-bank small business lenders use the Stated Income Approach for commercial mortgage loans in their Stated Income Business Loan Programs (most commercial mortgages up to $2 million qualify for these programs). This especially benefits self-employed small business borrowers who frequently have income that is erratic and difficult to document properly.
As noted above, there are many reasons that small business owners should not always use a traditional bank. A recommended follow-up to this article provides a review of the Top 12 commercial mortgage loan problems that small business borrowers should avoid ( http://steve.bush.googlepages.com/home ).
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