The traditional commercial lending role of banks in providing small business loans appears to be growing smaller. Some of the most critical issues likely to be confronted by small businesses involving lenders are summarized in a series of brief perspectives in this report.
“Avoid online applications for business financing” is some candid advice for small business owners desperately seeking new commercial finance funding. This suggestion is a specific attempt to emphasize that it is not prudent to provide confidential business finance information before it is determined that commercial financing is feasible for a particular financial need. Such automated application processes are obviously a convenience for the lender, but this does not translate to a sufficient reason for exposing private business data without knowing more about the small business loan criteria that will be used by the commercial lender receiving the information. An effective substitute for this questionable practice is to have a lengthy and candid individualized discussion with a small business financing expert to determine what the practical commercial loan options are in advance.
“Banks are not the solution, they are the problem” describes the unfortunate reality that bankers are just not what they used to be for most small business finance situations. Hardly a week passes without negative reports about the poor financial health of banks. In one recent report, it was noted that there are now more problem banks (which are banks judged by the Federal Deposit Insurance Corporation as being more likely to fail) then anytime in the past eighteen years. Troubled banks have grown from about 300 in early 2009 to just under 800 in the early part of 2010. It is likely for commercial borrowers to have even more trouble getting water from a well that is running dry with financial data like this.
An essential perspective for small business owners to have in the problematic loan climate displayed by most commercial lenders serving small businesses is “it is necessary to have realistic expectations”. Gone are the days of buying a business with little or no down payment. The relative ease of getting working capital has been replaced by a less predictable borrowing climate for any form of working capital that is not secured by assets, and it is important to expect this lending situation. Refinancing commercial real estate loans is now dependent on a much longer list of underwriting requirements that can realistically make attempts to refinance either difficult or impossible.
A reflection of the realistic possibility that something will go wrong with a current small business financing option is “small business owners should have a Plan B”, and to prepare for this business owners should do some advance planning. Contingency planning has always been a worthwhile task for a small business to employ for their management operations. To help soften the blow if problems develop with existing business finance services, it is strongly recommended that a variation of contingency planning also be adopted. Businesses will frequently uncover financial improvements that they can make immediately by engaging in this forward-looking approach to working capital management and business loans.
A funding solution from banks is not routinely appearing for business finance needs that most owners currently have. It should be noted that this brief evaluation covers only a small part of the total business lending picture likely to be experienced by small business owners.