Why does your commercial loan application get rejected?

Commercial loan applications are often rejected because of some problem in the documentation or some other reason. While this rejection does throw the business plans off-track for the applicant, it also makes it difficult for the borrower to approach other lenders since each rejection is recorded in the credit history and this is first thing a lender checks.

More often than not, rejections happen due to problems in credit history or documentation. Besides, an application can also get rejected if the business idea is a little too unique for traditional commercial banks even if the borrower has furnished satisfactory documents and his/her credit history is clear of any problems.

This article lists some of the most common reasons for commercial loan application rejection and provides a check list and some questions which must be asked before filing an application for a commercial loan or commercial mortgages.

<b>Reasons for commercial loan application rejection</b>


<b>Reason # 1:</b> The business plan is not up to the expectation and satisfaction of the loan officer or loan underwriter. The solution is either to go to a commercial loan lender who does not require a business plan beforehand or prepare a thorough one by taking help of professionals.

<b>Reason # 2:</b> The tax return throws up something which runs contrary to the rules and regulations of the business mortgage lender and shows a red flag to the loan underwriter. This "something" may be, in most cases, insufficient net income or some expense item or anything which plants a seed of doubt in the mind of the loan officer or loan underwriter. The way out is to pre-recognize the problem and keep a satisfactory explanation ready.

<b>Reason # 3:</b>

The business a borrower is involved in and is asking the loan for falls under the category of businesses most traditional banks will not include in their business lending portfolio. Bar/restaurant properties, auto service businesses, funeral homes, camp grounds and churches are some examples of such businesses which often do not find support from traditional lending institutions. The only solution for such borrowers is to look for lenders who deal in such businesses.

<b>Reason # 4:</b> In the case of refinancing a current commercial mortgage, banks usually cut the amount granted and place restrictions as to where the loaned funds may be deployed. This is not exactly the denial of a loan but since the required amount is not given it is equivalent to declining the loan.

<b>Reason # 5:</b> Lack of adequate collateral is one of the major reasons for denial of a commercial mortgage. Remember banks will not approve a commercial loan until or unless it is covered by adequate security. The adequacy of collateral depends upon the risk as perceived by the lenders.

<b>The checklist</b>

The following documents are absolutely necessary if you don’t want your loan application to be rejected. These documents help bankers make an informed decision about your business and its capacity to repay the loan amount.

# Income tax returns and other personal financial statements such as bank statements for the last three years
# Financial statements such as Profit & Loss and Balance Statement pertaining to the business in question for last three years
# Projected cash flow statements for the next 12 months
# Collateral sheet
# Well written business plan

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About the author

Richard Heaney is a writer on business and finance. He specializes in writing on financial planning, commercial loans, business mortgages and various other loan options. His write-ups highlight the different aspects of the credit market and broking firms providing commercial mortgages in UK.

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