Small Business Financing and Commercial Lending Problems

In spite of the questionable commercial banking practices illustrated below, there are some realistic and practical business financing solutions available to small business owners. 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. 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.

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. Especially if they need help finding realistic small business finance options, this is a critical issue for most commercial borrowers.

A growing 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 reported that they are continuing normally with small business finance programs, by almost any standard the actual results indicate something very different. 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. Business owners will need to be skeptical and cautious in their efforts to secure small business financing because of this particular issue alone.

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 commercial loans were made in which there was little or no equity by the business borrower. Banks invested almost nothing in cash (as little as three cents on the dollar) when buying future toxic assets. The apparent assumption was that if any downward fluctuation in value occurred, it would be a token three to five percent. In fact we have now seen many commercial real estate values decrease by 40 to 50 percent during the past two years. 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. In contrast to the government bailouts 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. 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.

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. An underwriting process known as stated income in which commercial borrower tax returns were not required was used for some small business finance programs. Lehman Brothers was one of the most aggressive commercial lenders using this approach, and they filed for bankruptcy due to this as well as other questionable financial practices.

Greed seems to be a common theme for several of the most serious business finance mistakes made by many lending institutions. 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. 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. 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. Commercial lenders made serious mistakes by almost any standard used to evaluate them, and according to a popular phrase, if business lenders and business owners forget these mistakes, they are doomed to repeat them in the future.