Small Business Financing Is a Growing Problem

Based on a number of small business financing statistics, commercial lending to small businesses is already on life support. Without government bailouts many commercial banks would have already failed. Even though that outlook is bleak, this report will provide an even more negative analysis for working capital and small business finance services. While we wish it were not the case, it is likely that commercial loans will be the next big problem for lenders.

For at least a year, banks have been experiencing both negative operating results and poor publicity. Actual business lending activity reported by banks conflicts with the usual attempt by politicians and bankers to portray banks as normal and healthy. Most bank financial results have been disappointing after working hard to solve massive residential loan problems. It is reasonable to ask if business banking has more potential disasters about to emerge based on what has been seen and reported so far.

Based on recent commercial banking statistics, it seems that small business financing is already the next big problem for many banks. The general decline in commercial real estate values during the past several years is a major factor in this conclusion. Because many large commercial real estate owners could not make their commercial mortgage loan payments or refinance business debt, this has resulted in some significant bankruptcies. The resulting bank losses are clearly having an impact now on commercial lending to small business owners even though these difficulties were primarily happening with large real estate owners and did not usually involve small businesses.

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. Such investments lost value so rapidly that they became known as toxic assets. The federal government provided bailouts to many banks to help them to keep operating when banks stopped making many loans that included small business financing. 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. With this approach by the banks, commercial lending activities for small business finance services have been effectively downsized or eliminated.

Bank losses on large commercial real estate loans have caused many banks to reduce or stop their commercial 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. The bank losses from large commercial property investors are producing a ripple effect that has caused small business funding to effectively disappear until further notice. Small business owners are being penalized when banks are unable or unwilling to provide normal levels of commercial finance funding to them because of losses involving larger commercial property companies. This bad situation is made even worse when we learn that many banks are hoarding cash and approving fewer commercial loans to allow them to quickly pay bailout funds back to the federal government. The primary logic for this approach is that it will allow banks to resume excessive bonuses and compensation to their executives.

A healthy amount of caution and skepticism will help commercial borrowers to ensure that they obtain adequate business loans for their business in the face of serious banking problems. At a minimum, small business owners should have a candid discussion with a commercial finance expert to determine how exposed their business might be to the developing problems with commercial banking. For many small businesses, the most objective business financing expert is not likely to be their current banker. If recent events are any indication, the banks themselves will not be very forthcoming about problems with their business banking practices.

Unfortunately one problem will lead to another, as is common with complex circumstances. The failure to obtain normal working capital financing and commercial financing will most likely lead to an increasing number of small business loan defaults by small businesses. Prudent business owners should begin to take action now in a timely manner to avoid such negative outcomes. The most serious small business finance problems can be anticipated and avoided with appropriate action.