3 Stated Income Commercial Loan Pitfalls to Avoid

Using stated income for a commercial loan is very common in the lending industry. Stated income is used when the loan amounts are small, or once the business has established relationship with the lender. Stating your income, instead of having to provide a lender with extensive documentation, can expedite your loan and helps you qualify for the amount applied. Many businesses use stated income loans to acquire capital.

When stating income for a commercial loan, a business provides an income amount based on past or current earnings. Stating income that is beyond what is customary in order to obtain a loan can lead to the business taking a larger debt obligation than you can afford. This could lead to loan default and adversely affect the company’s credit rating. The following are the  three most common types of stated income:

1. Stating Projected Income

Companies attempt to forecast their future earnings to establish an ideal of where they will be. It helps in their planning needs in terms of equipment, space and employees. Using projected income can give an appearance of a company’s future financial success.

However, projections may be unrealistic with certain economic conditions and can be inflated. The projections may also not be in line with the growth expectations for an industry. Check your projections thoroughly to ensure accuracy.

2. Stating Income in Advance of a Project Acceptance

Your company may be in line to receive funding from some project where a commercial loan is necessary to bridge a funding gap. The amount of income from the project may be more than sufficient to meet the company’s capital needs. Using that amount on the loan application puts the company in a better position to acquire the loan but may also become an issue if the project falls through or is cancelled.

Stating income that is anticipated from an accepted project bid provides the business with needed capital through a commercial loan and frees up current business capital.

3. Stating Income based on Prior Income

Another method for stating income can be the use of past earnings. Past earnings may be indicative of your future earning potential, provided that the business is producing at the same level. It is possible however to average a company’s prior year earnings and come up with an unusually high amount of income when in fact the business only had one large earning year that was abnormal for the company.

Using past earnings can provide a business with a basis for predicting future earning potential for your company. It should be noted that past earning may not be consistent and you could end up showing earnings trends that are not in keeping with the business’s outlook today or its future earnings.