How Commercial Lenders went wrong with Small Business Financing

How Commercial Lenders went wrong with Small Business Financing

Small business owners are likely to avoid serious future corporate finance issues with commercial capital management and commercial property loans by investigating what went wrong with corporate finance and commercial lending. This is not a hypothetical issue for most commercial borrowers especially if they need help deciding on practical small business financing choices available to them. The banks and banks responsible for the latest financial downturn seem to say that even if something went wrong everything is good now in commercial lending. Nothing could be further from the truth. Commercial lenders made serious mistakes and according to a popular phrase if business owners and entrepreneurs forget these mistakes they are convicted to repeat them in the future.

Greed seems to be a common theme for several of the most serious commercial mistakes made by many lending institutions. Unsatisfactory negative results were generated by the attempt to produce fast profits and higher than normal returns. The banks themselves seem to be the only ones who are surprised by the devastating losses they produced. The largest small business in the United States CIT Group declared bankruptcy after two years of trying to get someone to pay for their mistakes. We already see a record level of bank failures and of most accounts many of the largest banks should have failed but instead supported by artificial government funding.

When you make loans or buy securities like those now called toxic assets there were many cases where banks failed to look at cash flow. For some small financing programs a specified income for commercial loan bonds was used where the commercial borrowers returns were not even requested or reviewed. One of the most prominent business lenders who was aggressive with this approach was Lehman Brothers who applied for bankruptcy due to a number of dubious financial agreements.

Bankers obsessed with generating quick profits often failed with a basic investment principle that asset valuations can decrease rapidly and not always increase. Many corporate loans were completed where the commercial borrower had little or no equity at risk. Banks invested almost nothing in cash as little as three cents on the dollar when they bought future toxic assets. The obvious assumption was that if any downward fluctuation in value occurred it would be a token three to five percent. In fact we have now seen many commercial real estate values decline by 40-50 percent over the past two years. Commercial real estate proves to be the next toxic asset in its balance sheets for the many banks that made the original commercial mortgage on such commercial properties. Although there were huge government grants to banks that have poisonous assets based on housing bonds it is unlikely that banks will receive financial support to cover credit losses for commercial real estate. As a result a realistic expectation that such commercial financial losses can create serious problems for many banks and other lenders over the next few years. As noted in the following paragraph many lenders have already drastically reduced their small business finance programs.

Wrong and misleading statements by commercial lenders about their lending business for enterprise financing programs to small business owners is an ongoing problem. Although the banks have often reported that they usually lend themselves with their small business financing the actual results indicate something that is very different from any objective standard. It is obvious that lenders would rather not recognize publicly that they do not lend normally because of the negative PR impact that this would lead to. Entrepreneurs must be skeptical and cautious in their efforts to secure small business financing because of this specific problem solely.

There are practical and realistic solutions for small business finance available to entrepreneurs despite the unsuitable commercial lending practices just described. The focus here is to focus on the problems rather than the solutions mainly because of the long-standing perception of some that there are no significant current commercial lending problems. Despite opposing views from bankers and politicians collectively most observers would agree that the many mistakes made by banks and other commercial lenders were serious and are likely to have long-term effects for commercial borrowers.


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