Stated Income Commercial Loans Have Changed

For commercial borrowers seeking stated income commercial loans and commercial mortgages, there have been dramatic changes over the past year. These changes have resulted in more restrictive availability and terms of loans for small businesses based on stated income commitments. Very few traditional lenders are using a stated income process (no income verification, no tax, no IRS Form 4506) for their commercial real estate loans and commercial financing.This evolution is strongly based on problems that occurred with residential mortgage financing through income statements for the borrower. Whenever there is a financial crisis, lenders may legitimately seek to apply lessons learned to other business areas. In this case, the number of loan defaults which occurred with the stated income residential financing provide a practical reason for lenders to reduce or eliminate stated income commercial mortgages.One of the major lenders who had declared the income that provides business finance, as well as full documentation commercial loans suddenly stopped doing the small mortgage companies of all sizes and types. While it is clear that this particular lender had a variety of financial problems, his decision to leave the entire commercial mortgage business came as a surprise to most and has already led to direct and indirect impacts on other commercial lenders.One of these other commercial lenders has reduced commercial real estate loans and the types of property for its stated income commercial mortgage program. For several years this has been a leading provider of national lender financing companies reported earnings. Now have eliminated many restaurants and other businesses from their stated income loan programs. Besides reducing the size of their stated income commercial loans, have also significantly increased credit needs.Whether through a stated income commercial real estate loan or a business approach based on full documentation mortgage tax returns and financial statements, there is an issue of income that are often overlooked by commercial borrowers. This factor involves the absolute necessity of documenting business income for the necessary assessment. Even with stated income commercial loan underwriting, a business that the document still needed several years of income to support an acceptable level of assessment. For a business loan requiring full documentation of several years of personal and business taxes, the emphasis is usually placed on business income (based on corporate tax returns and business financial statements), which cover loan payments, rather than personal income levels (based on personal tax returns).Perhaps the only approach to trade finance, where we have not seen changes in the financing of the companies stated income business involves commitments for cash advances based on future programs for processing credit card transactions. For most working capital advances using credit card receivables, tax returns and financial statements are not required. For larger companies cash advances, however, the documentation might be necessary. This represents no change or a more restrictive lending practices such as financial statements and tax returns are also required prior to large transactions.Whenever there are changes like those noted above which appear to limit the funding options for commercial business owners, it is especially important to discuss trade opportunities with an expert in finance. As we have noted in several reports AEX Working Capital, at present there is a changing series of events (in addition to revisions in stated income commercial financing) to effect the majority of funding for U.S. companies. Many of these problems mean that the strategies of commercial loan is likely to be unknown to most small business borrowers.

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