OzeWorld Guide

What Went Wrong With Commercial Lending 1

The procedure for finding what proceeded to go wrong with commercial financing and small business financing was created to help business owners avoid serious future problems with their working capital loans and commercial mortgage loans. Small business owners could be more likely to avoid serious future business fund issues with working capital management and commercial real estate loans by discovering what went wrong with business funding and commercial financing.

This is not just a hypothetical issue for some commercial borrowers, particularly if they need to assist with determining practical small business finance choices that exist to them. Business owners should be ready for the banks and bankers who caused the recent financial chaos to state that nothing has gone wrong with commercial financing and even if it did everything is back to normal.

Most observers are significantly skeptical of this viewpoint. There have been serious mistakes created by commercial lenders, and to borrow a favorite phrase, if small business owners and business lenders choose to ignore these errors, they are doomed to replicate them. In analyzing the most serious business financing errors, substantial greed can be an inescapable theme among financing institutions. Negative results were unsurprisingly made by an attempt to produce higher-than-normal returns and quick profits.

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The only people apparently surprised by the destructive losses are the bankers themselves. After two years of trying to get someone else to cover their mistakes unsuccessfully, the largest small business lender in the United States (CIT Group) recently declared bankruptcy. We already are seeing a record level of standard bank failures and by most accounts lots of the largest banks should have been allowed to fail but were instead supported by artificial authorities funding. When making loans or buying securities such as those referred to as toxic possessions now, there were many instances in which banks didn’t look at cash flow.

A stated income business loan underwriting process was used for some small business fund programs where commercial borrower taxation statements weren’t even obtained. One of the most prominent business lenders aggressively using this process was Lehman Brothers (which submitted for bankruptcy credited to lots of questionable financial dealings).

Bankers enthusiastic about generating quick earnings frequently lost sight of a simple investment concept that asset valuations can decrease quickly and don’t always increase. Many business loans were finalized in which the commercial borrower experienced little if any equity at risk. When purchasing the future toxic resources, banks themselves invested less than three cents on the money.

The erroneous assumption by banking institutions was that any downward change in value would be limited by about three percent. In fact we have now seen many commercial real property values decrease by 40 to 50 percent during the past two years. Commercial real estate is showing to be the next toxic asset on the balance bedding for the countless banking institutions which made the original commercial mortgages on such business properties. While there have been huge government bailouts to banks which have dangerous assets predicated on residential mortgages, it is not likely that banking institutions shall get financial assist with cover commercial real property loan loss.

Such commercial real property financing deficits could produce serious problems for banks and other lenders on the three years. Much to the dismay of all business owners and as mentioned within the next paragraph, many commercial lending programs have already been dramatically reduced. An ongoing 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. Even though many banks have reported that they are continuing normally with small business fund programs, by almost any standard the real results reveal something very different.

From a public relations viewpoint, it is clear that banks wouldn’t normally confess publicly they are not financing normally rather. Business owners should be skeptical and cautious in their efforts to secure small business financing because of this particular issue alone. In spite of the doubtful commercial banking practices illustrated above, there are some reasonable and practical business financing solutions open to small business owners.