As published in Scotsman Guide's Commercial Edition, August 2007.
Do you know a restaurant that's always crowded? How about an auto-repair shop with demand in high gear?
Although these are popular businesses, when it comes to loan approval, restaurants and car-repair shops are on the "least popular" list for traditional lenders.
It can be hard to secure loans for small businesses like these, as well as for a host of other specialized property types. Most traditional lenders are skeptical of approving loans to such enterprises and consider them high-risk. Funding unique properties becomes even more complicated if there is insufficient income documentation or if the borrower is self-employed.
These lending barriers fall to the wayside, however, when brokers pursue stated-income/stated-asset (SISA) mortgages. A lender that offers stated loans typically does not require income verification or tax returns. If borrowers can't meet the documentation demands and financial-reporting covenants of a bank, they may prefer the streamlined process of SISA.
Let's look at some of the ways SISA loans can provide funding for small businesses.
Many auto shops perform body-repair and painting tasks that may create an environmental impact that must be managed carefully. Traditional lenders frequently view these property types as too problematic. They deny the loan requests outright.
If they do consider the loan, they may require time-consuming and expensive environmental reports. In fact, banks commonly charge small-business people for the full cost of these reports, even if they won't offer funding.
In contrast, a broker helping an auto-repair specialist secure a SISA loan will find fewer restrictions. For example, such lenders will typically consider environmentally sensitive property types after the completion of an environmental questionnaire.
An insurance company then reviews the information on the questionnaire to determine if the property poses an environmental risk. The cost of the premium varies depending on the loan amount and property type. The expenses involved, however, are substantially less than those involved in the reports that traditional lenders require. By using this screening process, nontraditional lenders often can finance riskier properties that many traditional lenders would not consider.
Traditional lenders are less likely to finance restaurants because of concerns about high rates of business failure, as well as borrowers' need to finance equipment.
One "solution" they commonly impose is to offer only short-term financing -- three to five years. In fact, short-term commitments may contribute to driving high failure rates for restaurants.
Alternatively, SISA lenders are more likely to offer financing for a wide range of food-service properties. They generally offer loans that span 15 to 30 years.
Your community is ripe with small-balance commercial lending opportunities. Here are some property types to pursue:
Mixed-use/apartment: These properties integrate residential spaces with commercial uses, such as retail or office space. They frequently have ground-floor retail stores or offices with apartments above.
Self-storage: One of the most-competitive building classes in the country, this kind of facility is designed primarily for storage. It includes cold-storage, recreational-vehicle and boat-storage facilities and transit facilities.
Warehouses/light industrial: These properties are single and multi-tenant facilities used for light manufacturing, distribution, research and development.
Special-purpose: This includes educational facilities, funeral homes, campgrounds, mobile home parks and marinas.
Health care: Included in this category are all assisted-living operations in which a license is required to operate.
With some networking and marketing efforts, you will quickly identify small-business owners and property investors to whom you can successfully deliver nontraditional lending solutions.
Tom Brubaker is vice president, marketing, for InterBay Funding LLC,
a commercial mortgage lender providing capital to small-business owners and commercial property investors throughout the U.S., Canada and the United Kingdom. With more than two decades of experience in financial-services marketing, Brubaker assists brokers in developing effective marketing strategies. Contact him at email@example.com.