We hear a lot of success stories when it comes to commercial real estate loans, but what happens if your CRE loan application gets rejected? It’s disappointing, and there are a lot of reasons why it might have happened. Odds are, the written notification you receive will explain why you weren’t approved, but if you still have questions, you can contact the lender and readjust your next application.
So, what are some of those reasons? Keep reading to learn why a loan could get rejected, what to do to pivot, and how Lincoln James Capital helps you know what lenders are actively looking for.
Why Would a Commercial Real Estate Lender Say No?
There are a few reasons a CRE lender could reject your application, and what you do next depends on why your application was denied.
Here are some reasons your application could be rejected:
- Leverage is too high
- Not enough liquidity from sponsors
- The loan being presented is not in that lender’s wheelhouse or area of expertise
- The loan doesn’t meet the Debt Service Coverage Ratio (DSCR)
You’ve Been Denied a Commercial Real Estate Loan: What Next?
First, don’t panic. It’s a challenging time; we’re in a capital markets maze and there are a lot of reasons your application could be denied. Some of those reasons might not even be your fault, such as information presented to the lender incorrectly or interest rates rising.
At Lincoln James Capital, we first try to figure out where it went wrong. What was presented to the lender that caused a problem? From there, we rework the package to give it a greater chance of qualifying with another lender. Our experts will work with you to find deals that align with the lender’s appetite.
What to do if your CRE loan is rejected due to high leverage.
Credit policies have forced lenders to lower their leverage and require more skin in the game. Lincoln James Capital can help borrowers by securing mezzanine loans, which help maximize borrowing capacity and compensate lenders for the high level of risk that comes with this type of loan.
What to do if your CRE loan is rejected due to insufficient liquidity.
Liquidity is how easily an asset can be converted to cash without losing its value. For example, when it comes to a commercial loan, liquid assets could be cash, real estate, investments in hedge funds, or shares in privately held companies. If your commercial loan is denied due to insufficient liquidity, you’ll have to improve your company’s liquidity ratio. You can do this by altering payment cycles, revisiting debt, cutting back on costs, and using long-term financing.
What to do if your CRE loan is rejected because it is not in the lender’s wheelhouse.
The answer to this issue is pretty simple: look for another lender. Keep in mind that not all lenders specialize in the same things, so working with a capital markets advisory firm that can find deals that fit what lenders are currently looking for is important. Lincoln James Capital isn’t the kind of firm that just throws ideas at the wall to see if they’ll stick; we use our large database of lenders to help you get your deal done with the right lender.
What to do if your CRE loan is rejected because it doesn’t meet the Debt Service Coverage Ratio (DSCR).
DSCR refers to the ability of a business or individual to cover their debt. The formula is pretty easy to follow:
Annual Net Operating Income / Annual Debt Service
Lenders almost always require borrowers to have a DSCR higher than 1.00. A business or individual with a DSCR of more than 1.00 means there is sufficient cash flow to cover debts. Alternatively, if a business or individual’s DSCR is below 1.00, there is not enough cash flow to cover the debt.
For example, if a business has a net operating income of $300,000 and a debt service of $250,000, their DSCR is 1.2.
If you do the math and discover that your DSCR is below the lender’s requirement, there are things you can do to improve it.
- Pay off any existing debt
- Negotiate to reduce interest rates
- Decrease operating expenses
Another way to improve your DSCR is by working with a financial professional like Lincoln James Capital.
Lincoln James Capital Can Work With You After a Rejection.
If your loan gets rejected, there is more than likely a manageable way to investigate and solve the problem. When you work with Lincoln James Capital, we leverage our large database of lenders to find commercial loans in your best interest, as well as work to find lenders who are actively seeking out deals that fit your situation.
Lincoln James Capital can help you find and secure CRE financing with the best terms
If you have commercial real estate investment opportunities, Lincoln James Capital can help get your deal done. We have extensive market knowledge and can help you make confident decisions. We have a large database of lenders with a wide range of possible terms. Keep in mind, that we don’t make more money from higher rates. We get paid to get our clients the loans they need with the best terms (which is not always the best rate) so they can close their deals and continue to build their businesses and increase wealth.