Business Mortgage Application Denied in Florida? Next Steps!

DAK Mortgage can help your business get approved by an alternative lender.

Commercial Mortgage Loan Turned Down by Bank. What Now?

You had grand plans to obtain a commercial real estate loan, whether you were looking to purchase a new multifamily investment property, refinance the mortgage on your office condominium, or obtain funds to renovate your rental property. However, that all came to a crashing halt when your bank turned down your commercial loan application.

This may be more common than you think, especially for small businesses.

According to a recent study, out of 3,628 companies (with 1 to 499 employees) that applied for mortgage loans, lines of credit, or other financing products in 2017, 23% were declined. The decline rate for companies with no employees on their payroll was even starker – out of 1,340 such companies that applied for financing in 2017, 36% were declined.  
Denial Rate for Companies (1-499 employees)
Denial Rate for Companies (0 employees on payroll)

In other words, you are definitely not alone.

But don’t be discouraged. Being declined by your bank is not a dead end. In fact, it should just be the beginning of the process. Many turned-down companies and individuals – even those that have been declined by banks, not once, but even two or more times – can quickly rebound and successfully obtain a loan from an alternative lender that has different or less stringent requirements than banks.

The first step is to find out exactly why your bank turned you down. We list the most common denial reasons below, including insufficient credit history or high debt levels.

Armed with this knowledge, the second step is to find an alternative lender who is more lenient toward your particular situation.

Be sure to also check out our guide on how to get a commercial real estate loan, which lays out the application process in 6 steps.

Step #1:  Determine why you were denied

Knowing the specific reasons your bank denied your business loan application can help you pinpoint whether you can improve your chances of success with the next potential lender. By law, you have the right to know the reasons for your denial.

Here are some of the most common denial reasons:

  1. Poor credit rating
  2. Industry is too risky
  3. Business is too new or has insufficient credit history
  4. Debt utilization is too high (or too low)
  5. Lack of solid business plan

Other common reasons lenders deny credit include weak business performance, insufficient collateral, lack of cash flow, or poor quality of earnings. Some lenders may require a personal guarantee or decline loan applications because the business has a poor customer mix, or is too reliant on too few customers, inexperienced management team, or because your entire industry is weakening. 

Chances are you may fit into at least two or three of the denial categories, and you may think they are insurmountable hurdles to getting a loan. But read on.

HELPFUL TIP

You have the right to know

Under federal law, you have the right to know the specific reasons why your business loan application was rejected.

If your business had gross revenues of $1 million or less in the preceding fiscal year, the law requires the bank to either (1) provide you an oral or written “statement of specific reasons” for the denial; or (2) simply notify you that you are entitled to the statement if you ask for it within 60 days of such notification.

If your business had gross revenues in excess of $1 million in the preceding fiscal year, the law requires the bank to provide you a written “statement of specific reasons” for the denial if you make a written request for the reasons within 60 days of the bank notifying you of the denial.

Therefore, if your bank has yet to give you the required “statement of specific reasons,” you should ask the bank for it. The bank’s statement must be “specific and indicate the principal reason(s)” and cannot simply state, for example, “You did not meet our internal standards.”

SOURCE: Equal Credit Opportunity Act (implemented by “Regulation B” or “Reg B”), 12 C.F.R. § 1002.9(a)(3)(i), (a)(3)(ii), (b)(2).

Near miss?

Sometimes you get some feedback from the lender and they tell you that you narrowly missed their funding criteria. You may just need a month or two of more bank statements and business history, for example. Or be able to show a little bit more in reserves. 

When this happens, the lender may approve a lower loan amount, or simply require more collateral. 

  • Get a new appraisal. You could get an updated appraisal of your building or other collateral. If you can show a more recent, up-to-date appraisal, or if a new appraiser can demonstrate market value that a previous appraisal missed, you might get approved for a higher loan amount. 
  • Double-check your credit report. If you’re on the loan, personally, you should check your personal credit report as well as your business credit report. There may be incorrect information on it that’s affecting your ability to get a loan. 
  • Cross-collateralize. If you own multiple properties, you may be able to pledge additional collateral that would justify the higher loan amount. 
  • Rent out some additional units. This expands your net income, and with it your debt service coverage ratio. That should help you qualify for a higher loan amount. 
  • Catch up on accounts payable. If your bank’s lending criteria requires “no current delinquent accounts” and you check your credit reports and they show current delinquent accounts, you might be able to fix that fairly quickly. 

Sometimes, with near-miss situations, you can make some minor adjustments like these and get the loan to go through without doing an entirely new application. In other cases, your lender may have a special “near miss” underwriting program available. These use some alternative underwriting techniques that allow them to accept a wider range of borrowers. 

More often, though, you’ll need to move on to a non-bank lender whose criteria is more aligned with your current situation. 

Bank lending doesn’t work for everybody. Fortunately, even if you’ve been turned down by your bank, the game isn’t up. You still have many options. 

Step #2: Find an alternative lender with the right loan program for you

Many individuals and business owners believe that once their bank rejects them, they have nowhere else to turn. But that’s not true. It is highly likely that your bank turned down your  application because you did not satisfy their strict in-house underwriting guidelines, which are known as “lender overlays” or “bank overlays”. The federal government sets official minimum standards, but most banks are more conservative and therefore apply additional guidelines on top of the official standards, hence the term “overlays.”

Fortunately, however there are many alternative lenders who, as compared to big banks, have more relaxed requirements and are willing to take on more risk. Alternative lenders have a wide variety of special loan programs that are specifically geared to businesses who were turned down by their banks, even applicants with insufficient credit history, poor cash flow, insufficient collateral and/or too much debt already.

The key, therefore, is finding a lender who imposes fewer restrictions or overlays than your bank, or applies a different method of underwriting, which will boost your chances of getting approved. For example, you may be able to sidestep the stricter underwriting through one of our small-balance commercial loan programs, which are perfect for bank lender turn-down situations. 

The good news is, no matter why the bank turned down your loan, there is a loan program out there for you.

HELPFUL TIP

Businesses, like people, have credit scores

Like consumer credit scores, business credit scores fall within a certain range, and the higher the score, the lower the perceived risk. While consumer credit scores generally range from 300 to 850, a business credit score might range from 0 to the 1000s, depending on the company providing the business credit score. The four major business credit bureaus are (1) Dun & Bradstreet; (2) Equifax; (3) Experian; and (4) FICO.

If your company is just starting, some of the credit bureaus (like Equifax and Experian) will not generate a business credit score for you until they are able to gather sufficient information about your company’s different milestones, including payment history to creditors, opening of business bank accounts in your company’s name, obtaining a federal Employer Identification Number (FEIN), and obtaining a listed telephone number in your company’s name. You can request Dun & Bradstreet to start compiling your company’s credit score by applying for a free identification number known as a “D-U-N-S Number.”

Unlike with consumer credit reports, you are not entitled by law to free access to your business credit reports. However, companies such as Nav offer free trials to let you access your business credit report, or you can contact the business credit bureaus directly to pay to see your credit status.

SPOTLIGHT – LOAN PROGRAMS

Of the different types of commercial real estate loans out there, we highlight some notable, creative programs offered by alternative lenders addressing a variety of situations. These programs are possible whether you’re seeking to buy or refinance, and whether the property is a commercial property, a residential investment property, or owner-occupied property. 

No matter why your bank declined your loan, chances are we have a loan program that will allow you to qualify for the financing you need. 

Low credit score?

Some lenders have less stringent credit requirements and are willing to accept low scores that a more conservative bank would not otherwise entertain. We also have loan programs that don’t require a personal or business credit score at all. These programs can be a great match if you have substantial assets to pledge as collateral for your loan, or that would be available to service the debt in the event your business suffers an income hit. 

For example, we had clients who owned an aircraft cleaning business in Miami. They needed to refinance one office condominium and buy a new office condo in the same complex. The catch: Their bank already turned them down because of significant credit problems. They had multiple recent delinquencies, and other derogatory information on their credit history, disqualifying them for traditional bank financing. 

We found an alternative non-bank lender who was willing to overlook their credit history, because of the value of the condos themselves. We were able to get them approved by a private lender

Too much debt?

Was your level of debt considered too high? Other lenders do not even require a certain debt-service coverage ratio (DSCR or the measure of your company’s cash flow available to pay current debt obligations). Instead, these lenders are willing to base the loan on the the value of the property and extend your company an asset-based loan. 

Example: One customer of ours was an Austrian national whose company owned three office condominiums in Florida, though the owner himself did not have a Social Security Number or pay personal income taxes in the United States. The loan on the three office condos was coming to the end of its term, and he would either have to refinance or make the balloon payment. 

The company’s debts were significant, and bank lenders already denied financing because the condos weren’t generating enough cash flow to cover the loan payments and other ownership expenses. 

But the banks overlooked the value of the properties themselves. They easily supported a loan of $1.2 million. And we were able to get that amount approved. Meanwhile, we were able to drop the interest rate from 15% to 9% – substantially lowering our client’s payments, and at the same time secure $200,000 in cash out to fund business operations, which was $50,000 more than the client was expecting. 

Click here to read more details. 

Line of business considered too risky?

Was your loan application denied based on the particular industry your business is in? Other lenders are willing to provide loans for a wider variety of commercial property types, including bars, taverns, automotive repair, daycare centers, restaurants, mobile home parks, golf courses, farms, hotels or motels, industrial, medical, cryptocurrency mining, marijuana or cannabis, self-storage, marinas, and senior care facilities.

Some lenders even specialize in specific industries. So they understand the risks and cash flow characteristics of each industry, and design loan criteria and terms to be realistic and affordable for businesses in those industries. 

Need a higher loan amount?

Was your loan-to-value ratio considered too high? Some lenders are willing to accept loan-to-value ratios as high as 80% to offer you the higher loan amount you are seeking. That means if you want to buy or refinance a commercial property worth $1 million, these lenders would be willing to lend up to $800,000 on it.

Need a bridge loan, fast?

Many times, our clients come to us in a time crunch: They’re under contract to purchase a property and the deadline is coming up fast. Or they have an existing loan expiring and a looming balloon payment to make, coming up in just weeks. In some cases, clients need to close fast to avoid a scheduled foreclosure just days away. 

There are often credit or other issues that cause them to get turned down by traditional bank lenders. Foreclosure bailout loans are credit-challenged loans by definition! 

But we do them all the time. 

If you’ve already had your mortgage turned down by the bank, chances are good you are running out of time, and need to close fast. 

Enter the “bridge loan.”

Bridge loans are shorter-term loans based entirely on the value of the underlying property. Sometimes called “hard money” loans, these loans are designed to meet urgent, immediate financing needs. 

To qualify, you don’t need to provide credit history, tax returns, or show proof of income. All you need to do is demonstrate to the lender how much the property is worth. 

Because the underwriting is so easy, bridge loans can sometimes be closed and funded within days.

No tax returns?

Did your bank require extensive paperwork? Other lenders with less stringent guidelines are willing to accept less documentation or alternative forms of documentation (e.g., business bank statements, instead of tax returns).

In one case, the owners of a Miami-based tile and paving company had trouble qualifying for a loan to buy a commercial property to run its business, because their tax returns didn’t show enough income. 

But they had plenty of cash flow, and their bank statements over the last two years more than justified the loan. We were able to find these clients a lender with a bank statement loan program. They came up with 24 months of bank statements showing regular business deposits. They didn’t need tax returns at all for this loan, and got approved for a $318,750 purchase loan to buy their property

A mortgage broker can help you find the needle in the haystack

Wading through the guidelines and overlays of multiple lenders and contacting them directly is difficult, if not impossible.

As a practical matter, lenders typically do not publish their overlays, but instead distribute them exclusively to banking officials such as licensed mortgage brokers.

Also, it is simply not feasible to even find the lenders – many alternative lenders do not advertise widely, but instead rely on mortgage brokers to refer them to potential borrowers.

A good mortgage broker with strong connections can quickly and simultaneously shop your loan at several different lenders for the best possible interest rate and terms.

Additionally, mortgage brokers are accustomed to helping businesses and individuals that were previously declined for a loan by their banks.

In short, working with a mortgage broker gives you access to a variety of lenders and more options.

Conclusion

You are now armed with the knowledge that (1) being denied for a commercial loan is very common; (2) you have the right to know the specific reasons for the denial; and (3) there are plenty of alternative lenders who would be willing to embrace your particular situation and lend money to your company.

See below for videos of how we can help businesses, who were previously turned down by their banks, obtain commercial loans. We would be glad to help you as well.

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