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Working Capital Financing And Commercial Lending Problems
Author : AlexFc Thomason
There are some realistic and practical business financing solutions available to small business owners in spite of the questionable commercial banking practices illustrated below. 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. 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. This is not an academic exercise or a waste of time for most commercial borrowers, particularly if they need help with determining practical small business finance choices that are available to them.
An ongoing problem is illustrated by misleading lender statements about their small business financing activities. Although banks have typically been reporting that they are lending normally with their small business financing, the actual results indicate something very different by any objective standard. 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. 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.
Commercial bankers routinely lost sight of a basic investment principle that asset valuations will not always increase and in fact can decrease quickly. 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. 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. 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. 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. 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.
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. For some small business finance programs, a stated income commercial loan underwriting process was used in which commercial borrower tax returns were not even requested or reviewed. 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.
For many of the most serious business finance mistakes made by lending institutions, greed is a common theme . 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. 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. If small business owners and commercial lenders choose to ignore the many mistakes made in recent years by business lenders, as noted in a popular phrase we may be doomed to repeat these mistakes.
Author's Resource Box
Steve Bush has provided candid advice to business borrowers for 30 years. He delivers business financing services and working capital help throughout the United States. Steve is a dependable source of commercial mortgage loans and is CEO of AEX Commercial Financing Group ( http://www.working-capital-journal.com )
Article Source:
Articlebliss
Tags: business financing, working capital, small business loans, commercial lending, finance, business, lending
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Submitted : 2010-02-13 Word Count : 826 Popularity: 75 Times Viewed: 4
