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The following article was published in our article directory on December 17, 2009.
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Small Business Finance - The Next Big Problem for Lenders?

Article Category: Finances

Author Name: Stephen Bush

Banks and other lenders have experienced both poor operating results and negative publicity for the past year or more. While both politicians and bankers would like to portray banks as healthy, the commercial lending practices displayed by most banks tell a different story. Most bank financial results have been disappointing after working hard to solve massive residential loan problems. It is reasonable to ask if commercial banking has more potential disasters about to emerge based on what has been seen and reported so far.

Based on a number of business financing statistics, commercial lending to small businesses is already on life support. Commercial banking companies in many instances would have failed some time ago without government bailouts. Even though that outlook is bleak, this report will provide an even more negative analysis for small business finance services. Overall it currently appears that commercial loans represent the next big problem for banks and other lenders.

During the past year or so, several banking problems have received significant publicity. These difficulties were largely related to the rising number of home foreclosures which in turn caused a ripple effect involving various investments tied to home loans. The questionable bank investments became known as toxic assets after losing much of their value. When banks stopped making many loans (including small business financing), the federal government provided bailout funding to many banks to enable them to keep operating. While most observers would argue that the bailouts were made with the implicit understanding that bank lending would resume in some normal fashion, the banks seem to be hoarding these taxpayer-provided funds for a rainy day. Commercial lending activities have all but abandoned small business finance needs by almost any objective standard.

Small business financing appears to already look like the next big problem based on commercial finance statistics recently released by many banks. The general decline in commercial real estate values during the past several years is a major factor in this conclusion. This has resulted in some significant bankruptcies when many large commercial property owners were unable to either make their commercial mortgage payments or refinance debt (or both). While these difficulties were predominantly happening with large real estate companies and did not regularly involve small businesses, the resulting bank losses are clearly having an impact now on commercial lending to small business owners.

Bank losses on large commercial real estate loans have caused many banks to reduce or stop their small business financing activities, and this has clear similarities to the earlier situation of residential mortgage loan toxic assets causing banks to stop normal lending because of capital shortages. A ripple effect from the large commercial real estate losses has resulted in the effective disappearance of small business financing. While small business owners did not cause this problem, they are suffering the immediate consequences when banks are unable or unwilling to provide normal levels of commercial financing to them. To make matters worse, many banks are approving fewer business loans and hoarding cash to enable them to repay federal bailout funds more swiftly. The only apparent rationale for the hoarding strategy is that it allows banks to resume executive bonuses and compensation that are not permitted until bailout funds have been repaid in full.

As with many complex situations, one problem will lead to another. An increasing number of small business loan defaults will be the most likely result of failure to obtain normal business financing. Prudent business owners should begin to take action now in a timely manner to avoid such negative consequences. The most serious small business finance problems can be anticipated and avoided with appropriate action.

At a minimum, small business owners should have a candid discussion with a small business finance expert to determine how exposed their business might be to the developing problems with commercial banking. Unfortunately we have already seen that the banks themselves are not likely to be forthcoming in a candid way about commercial lending problems. Except in rare instances, the most objective business financing expert will probably not be the current banker for a small business. A healthy amount of caution and skepticism will help commercial borrowers to ensure that they obtain adequate small business loans for their business in the face of serious banking problems.

Keywords: commercial lending,commercial banking,small business finance,business financing,finance,business

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