Small Business Finance - The Next Big Lending Problem? - By: Allan Michael Taylor

For at least a year, banks have been experiencing both negative operating results and poor publicity. Actual commercial lending activity reported by banks conflicts with the usual attempt by politicians and bankers to portray banks as normal and healthy. While the banks have worked hard to solve their massive problems involving residential loans, the financial results have been questionable. Based on what has been seen and reported, it is reasonable to wonder if commercial banking has more big problems lurking in the wings.

Judging by numerous business financing measures, commercial lending is already a huge problem for most small businesses. 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.

Several banking problems have resulted in significant negative publicity during the past year. 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. Commercial lending activities have all but abandoned small business finance needs by almost any objective standard.

It seems that small business financing is already the next big problem for many banks based on recent commercial banking statistics. 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. 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.

Much like the residential mortgage toxic assets caused banks to stop normal lending because of a shortage of capital, commercial banking losses on large commercial real estate loans are already causing many banks to stop or reduce their small business finance activities. The bank losses from large commercial property investors are producing a ripple effect that has caused small business financing to effectively disappear until further notice. 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.

Unfortunately one problem will lead to another, as is common with complex circumstances. 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.

Even if they do nothing else, business owners should have a straightforward conversation with a small business finance expert to assess how exposed their business might be to the brewing commercial banking problems. 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. To best ensure that they obtain adequate small business loans for their business in the face of serious banking problems, a healthy amount of caution and skepticism is in order for commercial borrowers.

About the Author

Stephen Bush and AEX Commercial Financing Group are experts in small business finance options and business finance consulting. Steve provides working capital management help and specialized business finance programs.

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