Stated Income Commercial Loans Have Changed

For commercial borrowers seeking stated income commercial loans and commercial mortgages, there have been dramatic changes during the past year. These changes have resulted in more restrictive availability and terms for small business loans based upon stated income underwriting. Very few traditional lenders are currently using a stated income process (no income verification, no tax returns, no IRS Form 4506) for their commercial real estate loans and other commercial financing.

This development is strongly-based on problems which occurred with residential mortgage financing using a stated income approach for borrowers. Whenever there is a financial crisis, lenders rightfully attempt to apply lessons learned to other business areas. In this case, the many loan defaults which occurred with stated income residential financing provide a practical rationale for lenders to reduce or eliminate stated income commercial mortgages.

One major lender which had been offering stated income business financing as well as full documentation commercial loans suddenly stopped making small business mortgages of all sizes and types. While it is clear that this particular lender had a variety of financial problems, their decision to completely exit the commercial mortgage business came as a surprise to most and has already resulted in both direct and indirect impacts at other commercial lenders.

One of these other commercial lenders has significantly reduced commercial real estate loan size and property types financed for their stated income commercial mortgage program. For several years this lender has been a prominent national provider of stated income business financing. They have now totally eliminated restaurants and many other businesses from their stated income lending programs. In addition to reducing the size of their stated income commercial loans, they have also significantly increased credit score requirements.

Whether using a stated income commercial real estate loan approach or a commercial mortgage based on full documentation with tax returns and financial statements, there is one key income issue that is frequently overlooked by commercial borrowers. This factor involves the absolute necessity of documenting business income for the required appraisal. Even with stated income commercial loan underwriting, a business will still need to document several years of income to support an acceptable appraisal value. For a full documentation business loan which requires several years of personal and business tax returns, the emphasis is usually placed on business income (based on business tax returns and business financial statements) that will cover loan payments rather than personal income levels (based on personal tax returns).

Perhaps the only commercial financing approach where we have not yet seen changes in stated income business financing underwriting involves business cash advance programs based on future credit card processing transactions. For most working capital advances using credit card receivables, tax returns and financial statements are not required. For larger business cash advances, however, income documentation might be necessary. This does not represent a change or more restrictive lending practices as financial statements and tax returns were also previously required for larger transactions.

Whenever there are changes like those noted above which appear to limit commercial funding options for business owners, it is especially important to discuss possibilities with a commercial finance expert. As we have noted in several AEX Working Capital reports, there are currently a number of rapidly-changing developments (in addition to revisions in stated income commercial financing) about to effect most business financing throughout the United States. Many of these issues involve commercial loan strategies that are likely to be unfamiliar to most small business borrowers.