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Commercial financing has changed dramatically during the past few months. The net result has been a reduction in commercial lenders as well as stricter standards for acquiring commercial loans and commercial mortgages. Unfortunately there has also been no shortage of misinformation about the availability of commercial funding, so an important change issue is to realize that for commercial lending there are both apparent changes and real changes.
As is often the case with financial changes, it remains to be seen how many will be temporary or permanent. But from a practical perspective, commercial borrowers are left with no choice but to adapt to the changing commercial finance environment. Regardless of how long the changes might be kept in place, small business owners must be prepared to operate within a more complicated climate for commercial real estate loans and business financing.
Perhaps the most dramatic change has been a significant reduction in business lending activity overall. This has been due to several events occurring almost simultaneously. Several major commercial lenders have gone out of business altogether. Many banks have stopped business finance lending while continuing consumer lending. Numerous business lenders have enacted stricter standards for the commercial financing transactions they are still willing to consider.
What should commercial borrowers do about this? A primary option that business owners should explore involves looking beyond their local market area for help with commercial real estate financing and other commercial loans. To accomplish this, it should be helpful to contact a working capital financing expert operating throughout the United States.
In addition to fewer business lenders to choose from, there are two other significant changes which must be anticipated by small business owners before seeking new business financing. First, most lenders have cancelled or are about to eliminate unsecured lines of credit for many businesses. Second, commercial lenders are increasingly demanding more collateral for virtually all commercial finance funding.
One effective commercial financing strategy for overcoming the combined obstacles of fewer lenders, more collateral and fewer unsecured credit lines is to consider a business cash advance program based on future credit card processing activity. This is proving to be one of the few sources of commercial funding that has not been adversely impacted by recent events. To learn more, it will be advisable to discuss the potential with a small business financing expert who can provide advice about business cash advances as well as other business finance solutions.
Another key change issue for commercial mortgage loans and working capital loans is simply the likelihood that more changes will be forthcoming in the near future. It is increasingly obvious that many banks will continue to modify their business lending programs in response to changing conditions as they occur.
To adequately prepare for future commercial finance changes that might (or might not) occur is a daunting task for a business owner. A commercial financing expert familiar with Plan B contingency financing for commercial loans will prove to be a valuable resource for any borrower wanting to seriously deal with both current and future changes impacting the financial health of their business.
Steve Bush is a working capital financing expert. Small business financing and commercial real estate financing advice. Commercial finance and business cash advance programs at AEX Commercial Financing Group
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 a hypothetical issue for most commercial borrowers, particularly if they need help with determining practical small business finance choices that are available to them. Business owners should be prepared for the banks and bankers who caused the recent financial chaos to say that nothing has gone wrong with commercial lending and even if it did everything is back to normal. It is hard to imagine how anything could be further from the truth. Commercial lenders made serious mistakes, and according to a popular phrase, if business lenders and business owners forget these mistakes, they are doomed to repeat them in the future.
Greed seems to be a common theme for several of the most serious business finance mistakes made by many lending institutions. Unsurprising negative results were produced by the attempt to produce quick profits and higher-than-normal returns. The bankers themselves seem to be the only ones surprised by the devastating losses that they produced. After two years of trying unsuccessfully to get someone else to pay for their errors, the largest small business lender in the United States (CIT Group) recently declared bankruptcy. We are already seeing a record level of bank failures, and by most accounts many of the largest banks should have been allowed to fail but were instead supported by artificial government funding.
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. For some small business finance programs, a stated income commercial loan underwriting process was used in which commercial borrower tax returns were not even requested or reviewed. One of the most prominent business lenders aggressively using this approach was Lehman Brothers (which filed for bankruptcy due to a number of questionable financial dealings).
Bankers obsessed with generating quick profits frequently lost sight of a basic investment principle that asset valuations can decrease quickly and do not always increase. Many business loans were finalized in which the commercial borrower had little or no equity at risk. When buying the future toxic assets, banks themselves invested as little as three cents on the dollar. 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. As a result, a realistic expectation is that such commercial finance losses could produce serious problems for many banks and other lenders over the next several years. Much to the dismay of all business owners and as mentioned in the next paragraph, many commercial lending programs have already been dramatically reduced.
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. It is obvious that lenders would rather not admit publicly that they are not lending normally because of the negative public relations impact this would cause. Business owners will need to be skeptical and cautious in their efforts to secure small business financing because of this particular issue alone.
There are practical and realistic small business finance solutions available to business owners in spite of the inappropriate commercial lending practices just described. 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 . Despite contrary views from bankers and politicians, collectively most observers would 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.
Stephen Bush and AEX Commercial Financing Group provide small business financing options for working capital loans, merchant cash advances and commercial real estate loans throughout the United States.
Recent commercial lender changes are likely to impact most small business owners. If a commercial borrower wants to continue their present banking relationship, they will find (in most cases) that the business lending changes are permanent and cannot be avoided. A few new and more flexible commercial lending sources represent a welcome exception to this trend.
One of the biggest commercial lending changes involves new guidelines for working capital financing. Most banks appear to be quietly eliminating business lines of credit or severely reducing the amount they are willing to finance to a level which is not helpful to an average business. Very few businesses can survive without a reliable source of working capital, so this change promises to receive the highest priority from most small businesses. To replace the disappearing commercial lines of credit, the most practical options for business borrowers include working capital loans and merchant financing from one of the alternative commercial finance sources still active in small business financing programs.
The difficulty of locating investment property financing illustrates another business lender change. If the commercial property is considered to be owner-occupied (the owner occupies a substantial portion of the building), more banks will be interested in making commercial real estate loans. Investors that do not occupy the property often own business properties like shopping centers and apartments. For many banks, it appears that they are currently restricting their commercial lending activities to those which qualify for SBA loans (Small Business Administration) which generally exclude investor-owned situations.
A third significant business lending change is demonstrated by revised guidelines for refinancing commercial real estate loans. In almost all cases, commercial lenders have dramatically reduced the loan-to-value percentages that they will lend. In some areas and for specific types of businesses, many banks will no longer lend over half of the appraised value. While this causes difficulties when attempting to buy a business, the problems for a commercial borrower reach a crisis magnitude when refinancing an existing commercial loan. In many cases the original business loan was based on a much higher percentage of business value than the bank is currently willing to provide. The lending problem is further compounded when a current appraisal reveals a decrease in value since the original loan was made. Due to a distressed economy which frequently results in decreased business income that then leads to lower commercial property values, such an outcome is especially common.
In a fourth example of commercial lending changes, for virtually all small business finance programs many small business owners have already discovered an inflated fee structure from most banks. Perhaps the bank perspective for some of the commercial financing fee increases is that they need to find a revenue source to replace the diminishing income from small business loans which has resulted from bank decisions to decrease commercial loan activity. When they encounter suddenly increased business financing fees levied by their current bank, business borrowers should seek different commercial funding sources except in unavoidable and unusual circumstances.
A final example of commercial lender changes is depicted by banks changing their overall guidelines for small business financing. Many banks have effectively stopped making any new commercial loans to small businesses regardless of business income or creditworthiness. Unfortunately these banks are not announcing publicly that they have discontinued small business finance activities. This means that while they might accept business loan applications, they do not intend to actually finalize commercial financing in most cases. Whenever it becomes obvious that the bank has no real intentions of making a requested working capital loan or commercial mortgage, this approach has clearly frustrated and enraged business borrowers.
The five commercial lending changes described above are unfortunately the proverbial tip of the iceberg. As they approach business lenders to obtain commercial real estate financing, working capital loans and small business financing, business owners will need to be especially skeptical and diligent.
Stephen Bush has provided candid advice to business owners for more than 25 years and is a small business loans expert. AEX Working Capital Financing and Small Business Financing