Finding And Solving Small Business Finance Problems

As independent and objective observers tend to agree (despite views to the contrary by most politicians and lenders), the series of mistakes made by commercial lenders were extremely serious and likely to be long-lasting for business borrowers. 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.

Small business owners will be more likely to avoid serious future business finance problems with working capital management and commercial real estate loans by exploring what went wrong with business financing and commercial lending. 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 routinely indicated that they are providing business financing on a normal basis, the actual results by almost any standard indicate otherwise. It is obvious that lenders would rather not admit publicly that they are not lending normally because of the negative public relations impact this would cause. As a result of this particular issue, small business owners will need to be cautious and skeptical in their attempts to secure business financing.

Bankers obsessed with generating quick profits frequently lost sight of a basic investment principle that asset valuations can decrease quickly and do not always increase. Many business loans were finalized in which the commercial borrower had little or no equity at risk. Banks invested almost nothing in cash (as little as three cents on the dollar) when buying future toxic assets. The erroneous assumption by banks was that any downward change in value would be limited to about three percent. In fact we have now seen many commercial real estate values decrease by 40 to 50 percent during the past two years. Commercial real estate is proving to be the next toxic asset on their balance sheets for the many banks which made the original commercial mortgages on such business properties. In contrast to the government b
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ailouts to banks having toxic assets based on non-performing residential loans, it is unlikely that banks will receive similar financial assistance to cover commercial mortgage problems. 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. For some small business finance programs, a stated income commercial loan underwriting process was used in which commercial borrower tax returns were not even requested or reviewed. One of the most prominent business lenders aggressively using this approach filed for bankruptcy due to a number of questionable financial dealings.

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. Negative results were unsurprisingly produced by an attempt to produce higher-than-normal returns and quick profits. 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. To close with a positive observation, there are practical and realistic small business finance solutions available to business owners in spite of the inappropriate commercial lending practices described in this article.

By: S.A. Bush

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Stephen Bush and AEX Commercial Financing Group are a reliable source of business financing services and commercial real estate financing. Steve has provided candid advice to business borrowers for 20 years and furnishes working capital and small business loans

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This entry was posted on Tuesday, May 25th, 2010 at 8:34 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.