Small Business Finance Options

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.

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.

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.

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.