Essentials of Borrowing
Business Loans - 7 Reasons Not To Use A Bank
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 reasons. 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 an 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, (see links below) 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.
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