You probably don’t think much about businesses and nonprofit organizations having to borrow money. But just like you took out a loan to buy your house, business and nonprofit entities need commercial loans to fund their operations. It might be obtaining new property or making capital improvements. Whatever the case, organizations often struggle to obtain conventional loans.
Conventional lenders often employ very thorough underwriting processes. They require detailed income verification. In their defense, they have valid reasons for doing what they do. Still, certain types of organizations struggle to meet all the requirements. They find it nearly impossible to obtain conventional funding because they simply cannot satisfy retail banks.
Here are some of the reasons organizations struggle to obtain conventional commercial loans, compliments of Salt Lake City’s Actium Partners, real estate hard money lending experts:
1. Lack of Steady Income
Some organizations are unable to verify a lack of steady income. A good example would be a church. Churches generally rely on voluntary financial gifts from members and non-member supporters. Moreover, said financial contributions are not necessarily steady. A church might have a particularly good year overall, but still struggle financially during certain months of the year.
This is pretty typical for all sorts of nonprofit entities. Donations ebb and flow. Some months they are up, other months they are down. Commercial banks are not comfortable with this sort of thing because making monthly payments is contingent on income being consistent from month-to-month.
2. Being Involved in a Questionable Industry
On the business side of things, organizations can struggle to obtain conventional commercial loans if they are involved in what is considered a questionable industry. A good example here is medical cannabis. Although more than three-dozen states have legalized medical cannabis, cannabis itself is still federally illegal. This concerns commercial banks, as it should.
There are all sorts of industries that, while legal, are considered questionable from a moral and ethical standpoint. Everything from gambling to adult entertainment needs to be considered from an ethical point of view before lenders can see their way clear to approving and funding a loan.
3. Past Credit Problems
Questionable credit is as unhelpful to businesses and nonprofits as it is individuals. Just as you might struggle to obtain a car loan if your credit history shows past problems, the same will be true for a small business trying to obtain a loan for capital investments. A poor credit history just makes obtaining financing much harder.
This is one particular area in which hard money has an advantage. According to Actium Partners, hard money lenders primarily make decisions based on asset strength. They are less concerned about a borrower’s credit history as long as the asset offered as collateral is valuable enough to support the loan.
4. Lack of a Clear Exit Plan
Commercial loans are a little bit different in the sense that borrowers are expected to have some sort of exit plan. What is an exit plan? It is a plan for paying back the loan in a timely manner. With a conventional loan, the exit plan is usually making monthly payments until the loan is completely satisfied.
An exit plan could look dramatically different with a hard money long. For example, a borrower could sell a piece of property to repay a hard money loan. Selling the property is the borrower’s exit plan.
There is no shortage of reasons obtaining conventional loans is difficult for businesses and nonprofits. Fortunately, hard money is an alternative. It is not the right choice for every funding need, but it can work well when it’s the obvious right choice.