What Happened with Business Financing

By exploring what happened with commercial lenders, business owners will be better prepared to avoid serious future problems with their commercial loans and commercial real estate financing. For many commercial borrowers, this is not a hypothetical issue at all, especially if they need help currently with small business finance options. The banks and bankers who caused the recent financial meltdown are likely to say that nothing went seriously wrong with working capital and commercial lending (and even if it did everything is fine now). Most observers are increasingly skeptical of this viewpoint.

For many of the most serious business finance mistakes made by lending institutions, greed is a common theme. An attempt to produce quick profits and higher-than-normal returns had unsurprisingly negative results. The bankers themselves seem to be the only ones surprised by the devastating losses that they produced. 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.

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. A stated income business loan underwriting process was used for some small business finance programs in which commercial borrower tax returns were not even obtained. One of the most aggressive commercial lenders using this approach filed for bankruptcy last year due to this as well as other questionable financial practices.

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. The apparent assumption was that if any downward fluctuation in value occurred, it would be very little. In fact we have now seen many commercial real estate values decrease by over 40 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. 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. As a result, a realistic expectation is that such commercial finance losses could produce serious problems for many banks and other lenders over the next several years. Despite ongoing concern and criticism about current reduced business lending activity, many commercial lenders have effectively stopped any meaningful small business financing.

A current and ongoing problem is represented by misleading and inaccurate statements by business lenders about their lending activities which include small business loans to business owners. 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. 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 cash advance programs and business financing.

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