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The following article was published in our article directory on November 24, 2009.
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What Went Wrong with Business Financing and Commercial Lenders?

Article Category: Finances

Author Name: Stephen Bush

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. The bankers and banks responsible for the recent financial meltdown seem to be saying that even if anything actually went wrong, everything is fine now in the world of commercial lending. It is hard to imagine how anything could be further from the truth. If small business owners and commercial lenders choose to ignore the many mistakes made by business lenders, as noted in a popular phrase we may be doomed to repeat these mistakes.

In evaluating the most serious business finance errors, massive greed is an inescapable theme among lending institutions. Negative results were unsurprisingly produced by an attempt to produce higher-than-normal returns and quick profits. The only people seemingly surprised by the devastating losses are the bankers themselves. After two years of trying unsuccessfully to get someone else to pay for their errors, the largest small business lender in the United States (CIT Group) recently declared bankruptcy. 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. Lehman Brothers was one of the most aggressive commercial lenders using this approach, and they 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. 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. 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. 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. Much to the dismay of all business owners and as mentioned in the next paragraph, many commercial lending programs have already been dramatically reduced.

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.

There are some realistic and practical business financing solutions available to small business owners in spite of the questionable commercial banking practices illustrated above. 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. Most objective observers (which do not include politicians and lenders) are almost unanimous that the series of errors made by business lenders are likely to be long-lasting for business borrowers in their ongoing efforts to obtain small business financing.

Keywords: business financing,business finance,small business finance,small business financing,finance,lenders

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