Small Business Loans and What Went Wrong with Commercial Lending

The process of finding what went wrong with commercial lending and small business loans is designed to help business owners avoid serious future problems with their working capital loans and commercial mortgages. The banks and bankers who caused the recent financial meltdown are likely to say that nothing went seriously wrong with commercial lending and even if it did everything is fine now. Nothing could be further from the truth. There were serious mistakes made by commercial lenders, and to borrow a popular phrase, if small business owners and business lenders choose to ignore these mistakes, they are doomed to repeat them.

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. Many commercial loans were made in which there was little or no equity by the business borrower. When buying the future toxic assets, banks themselves invested as little as three cents on the dollar. Greed seems to be a common theme for several of the most serious business finance mistakes made by many lending institutions. An attempt to produce quick profits and higher-than-normal returns had unsurprisingly negative results. The only people seemingly surprised by the devastating losses are the bankers themselves. The largest small business lender in the United States (CIT Group) declared bankruptcy after two years of attempting to get someone else to pay for their mistakes. We are now seeing a record level of bank failures, and by most accounts many of the largest banks would have failed if not supported by artificial government funding.

A current and ongoing problem is represented by misleading and inaccurate statements by business lenders about their lending activities which include small business financing to business owners. While many banks have routinely indicated that they are providing commercial loans 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 working capital financing and small business loans.

Business Finance Success

This report about small business finance success is meant to be a short survival guide for those business owners who are interested in obtaining small business loans. The suggestions contained within this article should be considered by most commercial borrowers in the early stages of their financial searching instead of a means of last resort due to the growing failure of banks to provide normal levels of business funding. The point of this discussion is to show that small business owners must do whatever is necessary to stay in business in a difficult business financing environment. In addition to the guerrilla financing tactics described in this report, there are several other important small business loan options which should be considered by commercial borrowers before finalizing their commercial loans, SBA financing or commercial mortgages.

For small business finance success in an erratic economy, the use of guerrilla loan tactics means that some commercial finance options which borrowers previously ruled out because they were considered too complicated (or too expensive) might deserve a second look. Small business owners should not overlook the growing evidence that business lines of credit have suddenly been reduced and commercial lenders are demanding increased collateral. As one practical alternative, business owners are now finding that using credit card processing to get working capital financing has become an effective option when they require additional money for their day-to-day operations.

The present harsh commercial lending climate means that virtually all small businesses will have to cope with difficult finance programs targeted to small businesses as well as banks that are currently functioning irregularly. The use of business consulting and a commercial finance expert should be considered as one way for business owners to overcome a substantial information gap. From the perspective of a small business owner, the key criterion for assessing the value of their bank is simply whether or not the bank can offer the desired commercial financing. If a bank is not offering commercial loans like they usually do, it probably is because they don't have enough money to lend. On the only scorecard that matters to most commercial borrowers, the small number of good banks will gradually become obvious based on their healthy business lending habits. When seeking a business loan in the current chaotic economic environment, small business owners must look out for their own best interests more and more because their bankers (who truly may be their best friends) are no longer coming through for them.

Small Business Financing Questions and Mixed Signals

Small business loans and working capital financing are producing questions and mixed signals for commercial borrowers. Commercial lenders are all-too-frequently reducing or canceling commercial credit lines, declining to refinance commercial mortgage loans and declining new applications for small business financing. To confuse matters, while disapproving and reducing loans, most lenders have announced that they are actively lending to businesses. There are several economic and financial issues causing the mixed signals and largely-unanswered questions. Many banks are under-capitalized and have been forced to increase their liquid assets to satisfy government standards. This need for more capital has forced a number of banks to both cancel some current loans and reduce their new loan activity. Another commercial lending problem has appeared when lenders depend on short-term financing sources and are now short of capital to make loans because their previous funding sources have disappeared.

From the perspective of a small business owner, what matters at the end of the day is having sufficient cash flow to support the operational requirements of their business. The inability to borrow needed funds on an ongoing basis will quickly produce serious consequences for any business because very few businesses are debt-free. The primary mission for commercial borrowers is likely to involve locating new sources of capital once they realize that their current lenders might not be up to the task of helping their business financially.

Since there appears to be an adequate supply of new lending sources to fill the void left by the exit of many banks and other lenders from commercial lending, there is good news emerging from this confusing and complicated lending climate for small businesses. Because it has become clear that there are other lending sources sufficient for solving the immediate problem, small business owners are in better shape than they probably realize to make it through the current business funding chaos despite mixed signals from lenders.

Small Business Loans and Plan B

To help small businesses and commercial property owners avoid unforeseen problems, contingency plans ("Always have a Plan B") are likely to be helpful. For a successful business, a Plan B mentality should be applied to many business operations and not just financial ones. For various reasons, however, contingency planning appears to be under-utilized when business owners are reviewing small business financing and commercial mortgages. This lack of contingency plans might be because commercial borrowers wrongly assume that there are not realistic alternatives to the working capital financing or commercial real estate loan they currently have. In such a case, it might not make sense to a business owner to pursue contingency financing plans. Despite such potential doubts, businesses should "Always have a Plan B" for their business financing options. Plan B contingency commercial financing can be evaluated like a form of insurance to protect a business owner in the event that something goes wrong with their existing financing. Provided below are two examples in which this could realistically happen.

• A surprising number of local and regional banks have recently decided to pull the plug on future small business loans in their lending portfolio. A Plan B should be developed for the contingency that alternative business loan arrangements could be needed if a business has commercial loans or commercial mortgages with a regional or local lender.
• Many commercial lenders have routinely included recall provisions that allow them to review commercial loan agreements annually. Lenders can selectively eliminate what they consider to be marginal loans by exercising the recall clause while they continue business financing for other borrowers. If the lender exercises their recall provision, the borrower will need to refinance or payoff the entire loan within a short period of time. An especially disturbing aspect of these terms is that even though they might have been making payments on time, the borrower effectively loses all control. If recall terms are included, a suggested solution for avoiding this possibility is to review current business loans and explore Plan B refinancing options.

Please remember that there are numerous potential situations where contingency plans might be appropriate for working capital financing and commercial real estate financing. As noted above — "Everyone should have a Plan B".

Avoiding Small Business Finance Malpractice

Avoiding malpractice for small business loans is becoming more difficult as well as increasingly important. Since ignoring the issue might result in devastating costs, any time and effort required to avoid such problems should be easy to justify. Business funding malpractice is a concern when there is a serious failure of professional duty. When commercial borrowers are seeking commercial loans, malpractice can occur with both lenders and brokers for business loans and commercial mortgages.

Inexperienced advisors are one of the biggest factors in malpractice associated with small business finance transactions. Starting a number of months ago, chaotic conditions began to impact residential real estate. This has produced problems for commercial borrowers since it has resulted in numerous former residential lenders and brokers now attempting to execute business loans because their previous residential lending activities have all but dried up.

Inexperience involving small business financing is never a good thing when you are describing a commercial lender or broker. In almost all cases, the complexity of small business loans coupled with inexperience is likely to result in a high potential for malpractice.

Even if they did a superb job with residential financing, it should not be assumed that a broker or lender will be good at successfully completing commercial real estate loans. There are many significant differences between small business financing and residential financing. It usually requires years of effort to master the intricacies of commercial loans.

Agents for many business cash advance programs are another common source of malpractice with working capital financing. Typical agents might not understand business loans in general because they represent only providers for credit card factoring. These advisors are frequently incapable of assisting with other forms of small business financing because they are usually focused on only the specific service that they provide.

Malpractice potential with merchant cash advance programs is directly related to the previous example described involving inexperienced lenders and brokers. This is because call centers which formerly dealt with residential real estate financing have now switched to merchant financing and credit card processing. Once again inexperience is never a good thing when complicated working capital management services are involved.

When analyzing potential obstacles for business loans and working capital loans, the two examples of malpractice described above are truly just the tip of the iceberg. The importance and value of being prudent in pursuing small business financing should be reinforced by this precautionary alert.

Commercial Lending and Bank Rage

Many small business owners are finding that they need commercial financing help for the first time in a generation due to the severity of recent economic turbulence. However, rage directed toward commercial lenders has become common because the process of obtaining small business loans is becoming impossible in many cases. Business owners are suddenly realizing that banks are not what they were just a few years ago.

A change in how banks take risks is one primary factor causing this problem for small business owners. A related issue is how banks are spending their scarce resources, and the result of this analysis is clearly producing a massive share of bank rage. Instead of traditional uses like business financing programs for small business owners and commercial property owners, many well-known banks are paying million-dollar salaries and bonuses to employees who have already taken their employers to the brink of disaster. Many banks unwisely invested in several variations of toxic assets, often paying as little as three cents on the dollar in cash and leveraging the remainder with debt. In what has to be seen as an outrage to almost everyone, even after banks have reported losing billions of dollars as a result of toxic asset transactions, they have repeatedly paid out billions of dollars to employees responsible for those worthless investments. While some will joke that this is nice work if you can get it, most pragmatic observers will readily say that this is no way to run a bank.

As one unsurprising result, the good banks have been stigmatized by the behavior of bad banks. Determination of whether their current banking relationship involves one of the good banks or bad banks might be the most practical business finance option to be evaluated by small business owners. Moving forward and getting beyond the prevailing bank rage is a worthy goal for any small business owner. A realization that they might need to fire their banker could be the most practical course to follow as small businesses ensure that they protect their own financial interests.

Commercial Refinancing

The need for small business owners to explore new options for commercial loan and working capital financing is illustrated by problems experienced when refinancing business debt. While business loan refinancing is still possible, there is a growing consensus that it has not been so difficult for several decades.

Refinancing difficulties are currently occurring with both short-term commercial funding and long-term commercial real estate loans. In some cases commercial borrowers are attempting to secure additional cash, and in other situations they are being forced to refinance an existing loan by the current lender. The need to replace existing business lines of credit with new financing arrangements is now emerging as especially difficult.

Because many banks have decided to stop making commercial loans, some borrowers will need to refinance simply to replace their existing commercial mortgage. Due to a slow economic pace, a number of small business owners are exploring the possibility of refinancing in order to get cash from existing equity to support their business financing needs. As borrowers are discovering, commercial refinancing is not as straightforward as it might have been in the past for either of these cases. In particular, there are two problem areas that will often be hard to overcome.

One factor proving to be a refinancing obstacle is business valuation. Declining sales levels lead to reduced commercial property values because commercial appraisals often derive business value from the income approach. The lack of recent profits for many businesses is another key problem impacting business loan refinancing. Many merchants are showing losses on recent tax returns and financial statements because of financial fluctuations. Recent losses are likely to be a significant difficulty when attempting to refinance commercial loans and commercial mortgages because lenders want current cash flow to cover debt payments.

Commercial borrowers should be better prepared with a realization that there might not be the usual obvious solutions to refinancing business loans. It is likely that most businesses will need to evaluate and consider both new commercial lending sources and new business financing programs before the end of their current efforts to refinance business debt.

Business Financing Help - Making Realistic Choices

When faced with small business finance decisions, it is essential for business owners to determine their practical and effective options. This will not be a simple task in view of volatile conditions which have recently impacted credit markets. Perhaps the most difficult challenge for business borrowers is obtaining an accurate picture about what is possible in realistic terms because of excessive confusion and misinformation about working capital and small business financing availability.

Even if they are satisfied with their current commercial financing arrangements, business owners would be prudent to evaluate business finance options that might be necessary if financial conditions continue to change. When assessing their realistic options in the current challenging business financing climate, there are a number of harsh realities which must be confronted by all commercial borrowers. There are at least five key factors to consider in terms of an immediate impact on most commercial finance services:

1. We are seeing that lenders are eliminating commercial lines of credit for many small businesses.
2. Commercial construction loans are only available on a limited basis.
3. Lending activities involving small business financing and commercial mortgages have been stopped by many banks.
4. Additional small business loan collateral is being requested by most commercial lenders.
5. Businesses which are not currently profitable or not current in their debt payments will encounter particular difficulties in seeking new business loans.

As noted above, there are some stark changes which now impact almost all new working capital loans and business financing. Despite these new and difficult challenges, most business owners will still be able to obtain basic financing, although it is very likely that either the terms or kind of financing will be different from previous commercial financing arrangements. Because many of the major providers have discontinued small business loans, the primary change for commercial borrowers will probably involve dealing with a new business lender.

Small Business Financing Heads in a New Direction

Commercial financing is heading in a new direction. The fact that banks and other commercial lenders have changed so dramatically in a very short period of time is one of the key factors impacting the new directions for small business financing. For the most part, these charges will probably be permanent. Multiple banks have stopped or reduced their commercial loan activities, and some business lenders have simply gone out of business.

Many banks have announced that they are lending normally while their actions suggest otherwise. Business lines of credit and commercial loans are being phased out by many banks. Reports of banks notifying business owners that they have only a few weeks to refinance their existing loans elsewhere have been widespread and common. With these multiple bank examples, the new directions for commercial borrowers are not optional or voluntary. In most cases, if business owners do not quickly move in a new direction for their small business financing, they will be without reliable commercial loan and working capital financing.

The urgency of locating new business funding sources might end up being an unforeseen advantage for many business owners. Unless a new lender was specifically needed for one reason or another, most borrowers have typically not been looking for new commercial finance sources. Now that many small business owners have been forced to find new providers for their business financing, a remarkable number of these borrowers are finding better business loan terms than the previous commercial lender was willing to provide.

Because commercial lending is extremely competitive, new lenders have emerged to replace the old ones. As business financing moves in a new direction, the banking industry is beginning to resemble other aging industries such as automobile manufacturers. While the similarities are probably not welcomed by many bankers, small business owners will now find that their commercial financing and working capital financing choices might have improved as a result.