- Business and Employment
Commercial Lending Guide
Commercial Banking Help for Business Borrowers
The Commercial Lending Guide is designed to provide practical business lending help for small business owners. As demonstrated by the information presented below, the risks and costs of dealing with commercial lenders have changed significantly during the past several years. While banks would like everyone to think all is well, that is not really the case from the perspective of small businesses and their commercial financing needs.
Real estate economics and the overall economy are part of the serious problem confronting commercial borrowers. A major part of an effective solution to these difficulties is successfully managing the risks involving commercial lenders.
Banks Are Not What They Used to Be
Banking Has Probably Changed Forever
I have been talking about variations of "bank rage" since well before the "Occupy Wall Street" movement gathered momentum. Commercial borrowers have repeatedly discovered firsthand that banks are not what they used to be. Determination of whether their current banking relationship involves one of the relatively few good banks might be the most practical commercial finance issue to be evaluated by small business owners.
A change in how banks take risks is one primary factor causing this problem for small business owners. While some business loans involving a certain amount of risk were previously provided to small businesses, banks have seemingly stopped making such commercial loans. Due to changes in legal guidelines (such as removal of Glass-Steagall Act protections), the primary risk-taking activities for most banks typically do not involve small businesses but instead opportunities offering the bank a higher profit potential. While profit is not a dirty word, banks have historically been held to a higher standard when it comes to taking risks. But that is no longer the legal framework governing banks.
A growing list of banking institutions that should be avoided
Zombie Banks — Only the Banks Live Forever
The banks keep giving us good reasons to worry. The title "Only the Banks Live Forever" was inspired by a chapter title ("Only the Rocks Live Forever") in one of my favorite books, "Centennial" by James Michener. The recent emergence of a new kind of failing bank known as "Zombie Banks" makes the title even more appropriate.
There are many banks currently operating only because of artificial government support and guarantees. Apparently the working theory is that there would be a crisis of confidence if too many banks failed, and "Too Many to Fail" is a new phrase to reflect this thinking. But if they are not lending normally to small businesses and others, are we really better off having them around?
Perhaps even worse is the negative impact that Zombie Banks are having on all other banks. The stigma of Zombie Banking is like a plague that is contagious. It's a "crowd mentality" at its worst, and yet the banking industry still acts like they did nothing wrong to cause the crisis several years ago. To listen to the bank lobbyists, it was just a small bump in the road and everything is back to normal now.
Here's one example of what they mean by normal. The Washington Post reported during the first quarter of 2013 that a number of banks were making payday loans at annualized interest rates up to 300 percent. Just your everyday "normal" 300 percent. If you're like most people, you will find lending practices like this outrageous (and probably not "normal").
Better Business Writing: One Key to Improving Communication with Lenders
Doing Whatever It Takes For Small Business Financing
Helping Your Business Survive When Banks Say "No"
This brief list is intended to illustrate the importance for small business owners doing whatever it takes to survive in a tough business climate. Ideally these suggestions should be considered by most commercial borrowers in the early stages of their financial search instead of only as a last resort due to the growing failure of banks to provide normal levels of business funding.
- Get Early Small Business Consulting Help
The current commercial lending climate is hard on inexperienced borrowers. Employing a small business finance consultant with an expertise in commercial finance should be thought of as an early option for those business owners trying to solve difficult financial problems in order to save their business.
- Determine Whether Your Bank is a Good Bank or a Bad Bank
Business owners should expect to need some professional help in finding the few remaining good banks.
- Be Prepared to Fire Your Bank and Your Banker
For small business owners unwilling to say "You're fired" to their bank when faced with the need to do so, be prepared to hire a new bank anyway.
- Plan B
These are unusual times that increasingly require new business tactics and strategies. Contingency planning such as having a Plan B (or Plan C or Plan D for that matter) can prove to be very helpful under such unpredictable lending and banking circumstances.
New Small Business Loan Sources
There appears to be an adequate supply of new business loan sources to fill the void left by the exit of many banks from commercial lending. Having a reliable commercial loan provider to consistently support the funding requirements of their business is what matters to most small businesses.
FAQ - Small Business Lending
Questions and Answers about Commercial Lenders
Question 1 — After they were given taxpayer funding by the financial bailout several years ago, are banks required to provide small business financing? What happened to the money?
No. It is a mystery that there were not such conditions placed upon the banks when they were saved from financial collapse by taxpayer funds.
As to what happened to all of those funds, the answer is somewhat technical (to say the least). The assets are considered to be what is known as "fungible." The banks tell us that it is not possible to say what happened to the taxpayer money given to the banks because the monetary assets are interchangeable with other funds ("fungible"). According to a number of reports, many banks saved from financial collapse now appear to be investing a significant portion of bailout funding in what most observers consider to be risky areas similar to what got them into trouble at the beginning of this crisis (such as financial derivatives).
Some banks have begun to see that the lack of lending to small businesses is turning out to be a public relations nightmare, and we are now seeing stories in the press suggesting that business lending "might have improved." Upon closer inspection, most of the accounts refer to "syndication loans" that were given to very large corporations and not to small businesses at all.
This explanation would probably inspire someone to write a book called "The Best Way to Rob a Bank Is to Own One" if William Black hadn't already written it (as noted below).
Question 2 — What does the phrase "Small Business Loans Without Banks" mean?
The recent turmoil in financial markets has certainly made it obvious (and painfully clear in most cases) that small business owners should not always rely on banks for effective commercial financing. I often refer to new alternative commercial loan choices as "Small Business Loans Without Banks" because in many cases the new sources of commercial loans are not banks.
A Conversation With William K. Black
The Title of the Book Says It All
Given the current circumstances and lack of legal restrictions to the contrary, there is little reason to expect that banks will return to previous levels of commercial lending to small businesses. As another example of how the banking world has changed, author William Black wrote a book entitled "The Best Way to Rob a Bank Is to Own One."
This is an "important book" in every sense of the term. You should be intrigued by the title. I certainly know I was when I first learned of this educational book about banks by a genuine banking expert — William K. Black. It is insightful on many different levels. You are likely to share what you learn with all of your friends. If you want to also hear what Bill Black is saying, please see the video above.
Risk assessment and risk management have become more important for commercial borrowers during recent years. Commercial lending and commercial banking have turned into a nightmare scenario for many small business owners. One of the most perplexing situations for commercial borrowers is the realization that there are now "good banks" and "bad banks.” Because of the complex changes and risks, small businesses should be prepared to take a more active role in dealing with commercial lenders.
Mixed Signals for Commercial Banking
While lenders have indicated that business lending is proceeding at a normal pace, commercial credit lines have been increasingly reduced or revoked entirely and fewer commercial mortgages are being completed in most locations. A direct result of this is confusion among business owners about the true availability of commercial loan refinancing and new commercial real estate financing. Some banks are certainly in much better shape than others (and the FDIC Problem Bank List is still a concern).
A Big Step in the Right Direction: Improving the Bottom Line
One More Thing
- "The more things change, the more things stay the same" is a common observation about how little change happens despite external events that indicate the status quo is not sustainable. We saw two superb examples of this during the middle of March 2012. Please recall that most U.S. financial institutions were on the brink of collapse during the 2008-2009 time frame. They were saved by taxpayer funding and now act as if nothing really happened.
To help prevent another recurrence of financial instability, the Federal Reserve has begun conducting annual stress tests that evaluate whether a bank can survive sudden economic gyrations like those seen in the recent Great Recession. In results announced in March 2012, 20 percent of the biggest banks flunked the test. (Banks would like this to be viewed as a positive outcome. What do you think?)
On another news front, a Goldman Sachs executive resigned very publicly by publishing what he really thought about the way that his (former) firm treated clients and attempted to make money for the firm in a "toxic and destructive" way.
The immediate lesson that I take from these two different events:
Based on their differing attitudes and actions involving financial risks and ethical treatment of clients by banks, there continues to be a growing list of banking institutions that should be avoided by individuals and business owners.
In a 2014 update, banks flunking the Federal Reserve stress test remained at 20 percent. By the middle of 2017, all major banks did pass the stress test (although it was apparently a close call for a few banks). This was the first time that all major banks passed since the financial crisis about 10 years ago.
The best way to rob a bank is to own one.— William K. Black
© 2009 Stephen Bush