Article DetailsSmall Business Loans and Commercial Lending Problems |
| Date Added: February 12, 2010 05:00:00 PM |
| Author: Stephen Bush |
| Category: Business: Finance Services |
| There are some realistic and practical business financing solutions available to small business owners in spite of the questionable commercial banking practices illustrated below. The emphasis here is focusing on the problems rather than the solutions primarily because of the lingering notion by some that there are not significant current commercial lending 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.
The process of finding what went wrong with commercial lending and small business financing is designed to help business owners avoid serious future problems with their working capital loans and commercial mortgages. This is not an academic exercise or a waste of time for most commercial borrowers, particularly if they need help with determining practical small business finance choices that are available to them. 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. Business owners will need to be skeptical and cautious in their efforts to secure small business financing because of this particular issue alone. Commercial bankers routinely lost sight of a basic investment principle that asset valuations will not always increase and in fact can decrease quickly. Many business loans were finalized in which the commercial borrower had little or no equity at risk. When buying the future toxic assets, banks themselves invested as little as three cents on the dollar. The erroneous assumption by banks was that any downward change in value would be limited to about three percent. To demonstrate how wrong the bankers were, commercial real estate values in many areas have already decreased during the past two years by up to 50 percent. 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. Such commercial real estate financing losses could produce serious problems for banks and other lenders over the next three years. Despite ongoing concern and criticism about current reduced business lending activity, many commercial lenders have effectively stopped any meaningful small business financing. There were many instances in which banks failed to look at cash flow when making loans or buying securities such as those now referred to as toxic assets. 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. We are already seeing a record level of bank failures, and by most accounts many of the largest banks should have been allowed to fail but were instead supported by artificial government funding. 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. |
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