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Commercial Lending Changes Hurt Small Business Financing Options
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If a small business borrower wants to continue their current banking relationship, they are likely to discover that recent commercial lending changes are permanent and cannot be escaped. A small number of new and flexible business lending sources provide a welcome exception to this trend. Nevertheless the business lender changes are likely to impact most business owners.
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. This change promises to receive the highest priority from most small businesses because very few businesses can survive without a reliable source of working capital. 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. Commercial properties like apartment buildings and shopping centers are often owned by investors that do not occupy the property. For many banks,[link widoczny dla zalogowanych], 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.
Revised guidelines for refinancing commercial real estate loans demonstrate a third significant business lending change. In almost all cases, commercial lenders have dramatically reduced the loan-to-value percentages that they will lend. Many banks will no longer lend over half of the appraised value for specific business types in some areas. The difficulty for a commercial borrower refinancing an existing commercial loan reach a crisis level very quickly when this happens. 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. This outcome is especially common in the midst of a distressed economy which leads to decreased business income that in turn often produces a lower commercial property value.
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,[link widoczny dla zalogowanych], 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. Small business owners will need to be especially diligent and skeptical as they approach business lenders to obtain commercial real estate loans,[link widoczny dla zalogowanych], business financing and working capital financing.
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