When it comes to buying or expanding a business, many business owners turn to commercial mortgage loans. These loans provide the necessary capital to purchase or refinance business properties.
However, securing a commercial mortgage loan is a complex process — it involves more than just paperwork. Poor credit scores, incomplete documents, and other factors can lead to loan rejection.
That is why it is crucial to understand the common pitfalls to avoid when applying for a loan. Here, we will discuss the same.
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Not Hiring a Commercial Mortgage Broker
A commercial mortgage broker is an intermediary between a commercial property owner and lenders. They can make the process of securing funds against commercial mortgages easy. Moreover, they can negotiate better on your behalf and guide you through the loan application process.
Failing to involve a broker often means missing out on valuable market insights and exclusive loan products that may not be directly accessible to borrowers. Brokers have access to a wide network of lenders and can match your business with the most suitable financing option based on your specific needs and financial profile.
Additionally, brokers understand the underwriting criteria of various lenders, which means they can help you avoid applications that are likely to be rejected and focus your efforts where they’ll be most successful. Their expertise can also help you structure your financials to meet lender expectations, ultimately increasing your chances of approval.
In a competitive lending environment, having a broker on your side can save time, reduce stress, and potentially save money over the life of your loan by securing more favourable terms.
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Not Understanding the Types of Commercial Mortgages
With many different types of commercial mortgages available, choosing the right one is crucial. This can help you determine the long-term success of your business.
Here are common types of commercial mortgages, each of which has different terms, requirements, etc.
| Loan Type | Loan Amount & Terms | Credit Requirements | Down Payment | Interest Rate |
| Conventional Bank Loans | 5–10 year terms | Minimum credit score of 660 | At least 20% | Typically 5%–7% |
| SBA Loans | SBA 7(a): Up to $5M, up to 25 years
SBA 504: 10–20 years |
Minimum SBSS score of 155 (SBA 7a) | Around 10% | Lower than conventional |
| Bridge Loans | 6 months to 3 years | Varies; generally more flexible | Can finance up to 90% | Higher than other loans |
Small Business Administration (SBA) loans are typically for stable, established businesses, whereas SBA loans and bridge loans are designed for small businesses seeking long-term financing and need immediate capital but plan to refinance later, respectively.
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Not Considering a Detailed Business Plan
Lenders check your application and business plan deeply before approving a commercial mortgage loan. They want to know how you plan to use the funds and what strategies you follow to generate revenue to repay the loan.
However, many business owners overlook the importance of having a well-proven business plan, which leads to loan rejection. In this business plan, you must cover the following points:
- Executive summary
- Market analysis
- Marketing and sales strategies
- Financial projections
- Business model and management structure
Adding the following elements to your business plan showcases your competence, clarity, and credibility. This makes it easier for the lender to approve your loan.
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Ignoring the 5 Cs of Credit in a Loan Application
Many business owners fail to evaluate their application from the lender’s perspective. Lenders assess risks based on the 5 Cs of Credit:
- Character – The lenders will check your credit score, payment history, past bankruptcies, and how responsibly you have managed debt in the past.
- Capacity – The lenders will analyse your debt-to-income ratio, cash flow and financial statements. This helps them to decide whether you are capable of repaying the loan or not.
- Capital – This is the amount that you have invested in your business as a business owner. The more the capital, the higher the chances of loan approval.
- Collateral – These are the assets you use to secure the loan, such as real estate.
- Conditions – Lenders look at the current market or economic trends. High inflation or low property value can lead to loan rejection.
In order to improve the chances of loan approval, doing a thorough self-assessment and applying your application while covering the 5 Cs of Credit is crucial.
The Bottom Line
While these are the common mistakes people make when applying for a loan, there are many more, such as not knowing the documents required, failing to get multiple loan offers, neglecting to factor in additional costs, etc. So, before you go ahead, it is wise to hire a commercial mortgage loan broker. They can help you enhance your chances of loan approval.