The Next Big Problem for Commercial Banking

For at least a year, banks have been experiencing both negative operating results and poor publicity. The commercial banking activity reports tell a different story than the portrayal as healthy and normal by bankers and politicians. Most bank financial results have been disappointing after working hard to solve massive residential loan problems. It is reasonable to ask if commercial banking has more potential disasters about to emerge based on what has been seen and reported so far.Judging by numerous business financing measures, commercial lending is already a huge problem for most small businesses. Without government bailouts, commercial banking companies would have failed some time ago in many cases. As bad as that outlook is, this analysis will describe an even more negative perspective for small business finance options. Overall it currently appears that commercial loans represent the next big problem for banks and other lenders.Several banking problems have resulted in significant negative publicity during the past year. These difficulties were largely related to the rising number of home foreclosures which in turn caused a ripple effect involving various investments tied to home loans. The questionable bank investments became known as toxic assets after losing much of their value. The federal government provided bailouts to many banks to help them to keep operating when banks stopped making many loans that included small business financing. While most observers would argue that the bailouts were made with the implicit understanding that bank lending would resume in some normal fashion, the banks seem to be hoarding these taxpayer-provided funds for a rainy day. Commercial lending activities have all but abandoned small business finance needs by almost any objective standard.Small business financing appears to already look like the next big problem based on commercial finance statistics recently released by many banks. In part this is due to the general decline in commercial real estate values during the past several years. This has resulted in some significant bankruptcies when many large commercial property owners were unable to either make their commercial mortgage payments or refinance debt (or both). While these difficulties were predominantly happening with large real estate companies and did not regularly involve small businesses, the resulting bank losses are clearly having an impact now on commercial lending to small business owners.Bank losses on large commercial real estate loans have caused many banks to reduce or stop their small business financing activities, and this has clear similarities to the earlier situation of residential mortgage loan toxic assets causing banks to stop normal lending because of capital shortages. The bank losses from large commercial property investors are producing a ripple effect that has caused small business financing to effectively disappear until further notice. While small business owners did not cause this problem, they are suffering the immediate consequences when banks are unable or unwilling to provide normal levels of commercial financing to them. This bad situation is made even worse when we learn that many banks are hoarding cash and approving fewer commercial loans to allow them to quickly pay bailout funds back to the federal government. The only apparent rationale for the hoarding strategy is that it allows banks to resume executive bonuses and compensation that are not permitted until bailout funds have been repaid in full.Unfortunately one problem will lead to another, as is common with complex circumstances. An increasing number of small business loan defaults will be the most likely result of failure to obtain normal business financing. To avoid such negative consequences, prudent business owners should begin to take timely action now. The most serious small business finance problems can be anticipated and avoided with appropriate action.Small business owners should have a candid conversation with a business finance expert to evaluate if their business might be exposed to the developing commercial banking difficulties. If recent events are any indication, the banks themselves will not be very forthcoming about problems with their commercial lending practices. For many small businesses, the most objective business financing expert is not likely to be their current banker. To increase the chances that they receive sufficient small business loans in the face of ongoing lending problems, a healthy amount of skepticism and caution will be helpful for business owners.