Finding and Solving Working Capital Financing Problems - By: Allan Michael Taylor

As independent and objective observers tend to agree (despite views to the contrary by most politicians and lenders), the series of mistakes made by commercial lenders were extremely serious and likely to be long-lasting for business borrowers. 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.

By exploring what went wrong with commercial lenders and small business financing, business owners will be better prepared to avoid serious future problems with their working capital financing and commercial real estate financing. 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.

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. 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. From a public relations viewpoint, it is clear that banks would rather not admit publicly that they are not lending normally. Business owners will need to be skeptical and cautious in their efforts to secure small business financing because of this particular issue.

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. Banks invested almost nothing in cash (as little as three cents on the dollar) when buying future toxic assets. 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. Such commercial real estate financing losses could produce serious problems for banks and other lenders over the next three 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. A stated income business loan underwriting process was used for some small business finance programs in which commercial borrower tax returns were not even obtained. One of the most aggressive commercial lenders using this approach filed for bankruptcy due to this as well as other questionable financial practices.

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. Unsurprising negative results were produced by the attempt to produce quick profits and higher-than-normal returns. 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. But in spite of the questionable commercial banking practices illustrated above, there are some realistic and practical business financing solutions available to small business owners.

About the Author

Stephen Bush and AEX Commercial Financing Group are a consistent source of business finance services and commercial real estate loans. Steve has provided effective advice to small businesses for 25 years and delivers working capital and commercial loans

Article Directory Source: http://www.articlerich.com/profile/Allan-Michael-Taylor/45501

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