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Commercial Lending Problems for Working Capital Financing |
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Written by Webmaster
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Monday, 15 February 2010 |
By Roberto Garabell
 There are some realistic and practical business financing solutions available to small business owners in spite of the questionable commercial banking practices illustrated below. Because of one lingering viewpoint that any significant commercial lending problems have been eliminated, the emphasis here is not on solutions but rather on the underlying problems. Despite contrary views from most bankers and politicians, objective observers would tend to agree that the multiple mistakes made by banks and other commercial lenders were serious and are likely to have long-lasting effects for commercial borrowers.
By exploring what went wrong with commercial lenders and small business financing, business owners will be better prepared to avoid serious future problems with their working capital financing and commercial real estate financing. Especially if they need help finding realistic small business finance options, this is a critical issue for most commercial borrowers.
An ongoing problem is illustrated by misleading lender statements about their small business financing activities. While many banks have reported that they are continuing normally with small business finance programs, by almost any standard the actual results indicate something very different. From
a public relations viewpoint, it is clear that banks would rather not admit publicly that they are not lending normally. As a result of this particular issue alone, small business owners will need to be cautious and skeptical in their attempts to secure business financing.
Commercial bankers routinely lost sight of a basic investment principle that asset valuations will not always increase and in fact can decrease quickly. Many commercial loans were made in which there was little or no equity by the business borrower. Banks invested almost nothing in cash (as little as three cents on the dollar) when buying future toxic assets. The apparent assumption was that if any downward fluctuation in value occurred, it would be a token three to five percent. In fact we have now seen many commercial real estate values decrease by 40 to 50 percent during the past two years. For banks which made the original commercial mortgage loans on such business properties, commercial real estate is proving to be the next toxic asset on their balance sheets. While there were huge government bailouts to banks which have toxic assets based on residential mortgages, it is not likely that banks will receive financial assistance to cover commercial real estate loan losses. Over the next three years it is currently projected that these growing commercial mortgage losses will pose serious problems for the ongoing survival of many business lenders. Despite ongoing concern and criticism about current reduced business lending activity, many commercial lenders have effectively stopped any meaningful small business financing.
When making loans or buying securities such as those now referred to as toxic assets, there were many instances in which banks failed to look at cash flow. An underwriting process known as stated income in which commercial borrower tax returns were not required was used for some small business finance programs. One of the most prominent business lenders aggressively using this approach was Lehman Brothers (which filed for bankruptcy due to a number of questionable financial dealings).
For many of the most serious business finance mistakes made by lending institutions, greed is a common theme . Unsurprising negative results were generated by the attempt to produce quick profits and higher-than-normal returns. The bankers themselves seem to be the only ones surprised by the devastating losses that they produced. The largest small business lender in the United States (CIT Group) declared bankruptcy after two years of attempting to get someone else to pay for their mistakes. By most accounts many of the largest banks should have been permitted to fail but were instead kept afloat by government bailouts, and even after that experience we are still seeing a record level of bank failures. If small business owners and commercial lenders choose to ignore the many mistakes made in recent years by business lenders, as noted in a popular phrase we may be doomed to repeat these mistakes.
Stephen Bush has provided candid advice to business owners for 30 years. He furnishes small business financing options and business cash advances throughout the United States. Steve is a reliable source of commercial mortgage loans and is CEO of AEX Commercial Financing Group ( http://aexcommercialfinancing.com )
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Last Updated ( Monday, 15 February 2010 )
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