Business Loans - Why Not To Use Your Bank For Loans

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Business Loans - Why Not To Use Your Bank For Loans
So you're a small business owner and you need a business loan to further the objectives of your company. Where do you turn?

When it comes to a business loan or commercial real estate loan, there are many good reasons NOT to turn to a traditional bank. Here are some of the most important. Many small business owners, will find most of these points directly applicable to them.

"The bank turned me down"

Of course the biggest reason most small businesses go looking for alternative sources of commercial real estate loans is because they have been declined by the banks. Small businesses are often forced to look for other sources of funding because the banks will not provide it. This is not even listed below, since there are many positive reasons to prefer non-bank funding, even if you can get approval from a bank.

Reason 1 - The minimum loan amount available from banks is too high

In many cases banks will not offer a commercial real estate loan for less than $250,000. So if you only need $100,000 you will be pushed to borrow more than you actually need. Or if your property will not support a $250,000 loan you are out of luck with the banks.

The solution is to look for an alternative funding source that can provide a lower minimum amount. Some commercial financing services will go as low as $100,000, and will often give you better terms and much better service than the traditional banks.

Reason 2 - Many traditional banks will charge you an up-front "commitment fee" just to examine and process your application

Banks usually think they are doing you a favor by processing your application, so they will often make you pay for their attempts to win your business.

The solution is to find other established and credible lenders who are eager to offer you better service without charging you a fee for processing your application.

Reason 3 - Most traditional banks will severely limit the amount of cash you can get from a commercial real estate loan.

Banks usually have very narrow rules about where you can use the cash derived from a commercial real estate loan. If you need a cash injection for your business, or want to use the proceeds from a commercial mortgage as a down payment for another property, most banks will not be interested in that type of loan.

Look for a lender who does not restrict your use of the cash derived from commercial real estate loans. Some services, such as AEX Commercial Financing Group, LLC can provide commercial loans that give you up to $1 million in cash to use however you want.

Reason 4 - Most traditional banks require detailed business plans before approving a commercial real estate loan

Many small businesses have business plans, but they are usually not sufficiently detailed to satisfy the banks. As a result, applying for a commercial real estate loan from a bank can turn into a very time consuming and expensive process. Creating the type of business plan that is adequate for the banks will usually cost thousands of dollars.

Find a lender who does not require business plans as part of their underwriting process for a commercial loan.

Reason 5 - Many traditional banks require tax returns for a commercial real estate loan

If you are either unable or unwilling to provide tax returns for your business, many banks will not give you a commercial real estate loan. Even some of those banks that do not request tax returns will ask borrowers to sign IRS Form 4506, which authorizes the lender to obtain tax returns directly from the IRS.

When looking for alternative sources of funding make sure they do not require either of these conditions (tax returns or access to your IRS records).

Reason 6 - Most banks will require cross collateralization of personal property

Even though there is sufficient collateral in your business property to secure a commercial real estate loan, many banks will require you to provide additional security by putting up personal assets. Business people have become so used to banks doing this that they just assume it is a necessity.

But the truth is, over-collateralization like this can restrict your personal freedom to dispose of your personal assets as you see fit. And fortunately, there are non-traditional lenders who do not require cross collateralization at all.

Reason 7 - Most banks require income verification

Many small business people and self-employed borrowers have incomes that are erratic and difficult to document. There are many legitimate reasons for this, but traditional banks generally do not care. Very few of them will provide commercial real estate loans without complete income verification.

An alternative used by some non-traditional lending sources is to use the "Stated Income" approach. Look for a lender who uses the Stated Income approach and does not require income verification.

For more information about commercial real estate loans seeCommercial Loans. If you have had trouble securing a business loan, see Difficult Loans.

Rick Hendershot is an online publisher. For online promotion ideas see Linknet Promotions.

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Loan Process - Applying for a Loan

In making loan requests, entrepreneurs tend to be confident that they will meet or exceed what they consider conservative financial projections. They then have trouble understanding when they receive a less than enthusiastic response. To complete the picture, however, we need to look at the process from the banker's perspective.

"What bankers view as a good loan application is at times different from what applicants think," says Ray Fincken, vice president of HSBC Bank USA in New York. "Applicants know the bank needs information about their company to process the loan. So in the first interview they often describe all the good things happening within their company -- focusing mainly on marketing and sales.

"However, bankers are usually more interested in assessing risk and consequently learning that the company has a good core foundation. Does the company have experienced management? Do these managers have various talents and experiences to guide the company through good times and bad?"

Given confidence in the management team, the bank must look at the elements of the business plan from a more objective standpoint than the entrepreneur ever can. The critical consideration is whether the company's major products or services provide sufficient profitability and cash flow to meet all its financial obligations, particularly payments to service the debt under consideration.

If the company is a startup, the best indicators are often the norms for the business in which the company will be competing. Are projected margins and ratios in line with others in their industry? The bank will also look at credit reports and tax returns on the key individuals involved in the startup.

If the company has some financial and credit history, the bank will check corporate tax returns and financial statements, individual financial statements, liens, litigation, agency reports such as Dun and Bradstreet, etc. To ensure finances are in order, Ray recommends receiving your personal and business credit reports prior to seeking a loan to make sure the information is correct before going through this process. Misinformation or old loans and liens may erroneously still be on the report. Taking care of these errors prior to applying for a loan can streamline the process.

Fincken says: "We look for consistent, sound cash flow from operations and good, quality assets. We look at these because they are the primary sources of repayment. We then analyze this information and compare it to other similar businesses as a guide."

Once the records are in order, the next step is the bank's formal application process. "Planning ahead will help you increase your chances of receiving a loan as well as streamline the loan timeline," Fincken advises. "Put together a business plan and description of why you need financing; include three years of financial statements or projections."

Expect to be asked, and prepare your answers to the following questions:

- How much money is needed?

- What is the purpose of the loan?

- How long do you anticipate using the money?

- How will the company be able to pay back the loan?

- How will the bank get paid if something goes wrong?

Here is a list of the most common reasons for loan denials:

- The company is deemed unable to repay the loan

- There is inadequate financial information

- The financial statements are unprofessionally prepared

- There are perceived critical weaknesses in management

- Applicants fail to demonstrate their ability to implement sound accounting and management information systems.

You would certainly be reluctant to extend credit to a prospective customer where you had significant doubt of their ability to pay. Remember that the bank's business is to lend money, and that they must apply the same discretion to your request.

John B. Vinturella, Ph.D. has almost 40 years experience as a management and strategic consultant, entrepreneur, author, and college professor. For 20 of those years, Dr. Vinturella was owner/president of a distribution company that he founded. He is a principal in business opportunity sites jbv.com and muddledconcept.com, and maintains business and political blogs.


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Business Loans - Why Not To Use Your Bank For Loans
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