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SpinDistribute.com Article Directory

The following article was published in our article directory on March 4, 2010.
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Finding and Solving Small Business Finance Problems

Article Category: Finances

Author Name: Stephen Bush

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. Due to the lingering impression by some that there are not significant commercial lending difficulties currently, the intentional emphasis here has been a focus on the problems rather than the solutions.

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. For many commercial borrowers, this evaluation can prove to be invaluable, especially if they need help currently with small business finance options.

An ongoing problem is illustrated by misleading lender statements about their small business financing activities. While many banks have routinely indicated that they are providing business financing 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. 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 apparent 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 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. In contrast to the government bailouts to banks having toxic assets based on non-performing residential loans, it is unlikely that banks will receive similar financial assistance to cover commercial mortgage problems. 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.

When making loans or buying securities such as those now referred to as toxic assets, there were many instances in which banks failed to look at cash flow. An underwriting process known as stated income in which commercial borrower tax returns were not required was used for some small business finance programs. One of the most prominent business lenders aggressively using this approach filed for bankruptcy due to a number of questionable financial dealings.

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. Negative results were unsurprisingly produced by an attempt to produce higher-than-normal returns and quick profits. 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. On a positive note, there are some realistic and practical business financing solutions available to small business owners in spite of the questionable commercial banking practices illustrated above.

Keywords: small business loans,commercial lending,business financing,working capital,finance,business,lending

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