Commercial Loans – Crisis or Maneuver?
Small business owners are at an advantage when it comes to business news. The small business boom created a large number of new jobs – many of them in fields that were considered unprofitable just a few short years ago. In addition, a large number of business-related industries have been created, like medical transcription, home business, computer programming, and information technology. Consequently, more business professionals are entering those fields, seeking either higher pay or a more congenial environment.
The authors of this book argue that small businesses need both capital and marketing to survive economic times that are already tough. Specifically, they recommend five guidelines for small businesses coping with a rocky future: Avoid being distracted by quarterly profits; keep your eyes on the bottom line; understand the distinction between business finances and business operations; use debt and equity financing wisely; and remember that credit is not a cure-all. They also provide five tips for navigating an increasingly uncertain financial future: 1} Don t ever make impulsive decisions; take time to analyze your business plans and your finances; know your business well; and don t act before you think. In addition, the book describes new methods of assessing business risk and the importance of using financial statements and financial modeling in business decision making.
The authors recognize the unique challenges small businesses face. While there are many economic theories that have been proposed to explain the current crisis, the authors instead focus on describing a core dilemma that has plagued many small businesses – the inability of banks to provide small business loans. They write, “A key problem faced by small businesses is that many banks continue to focus on business loans rather than lending money to businesses that produce and/or provide goods and services that they can financially support.” Surprisingly, even though many banks have scaled back their commercial lending activities, they have not done so to the degree that would result in more business opportunities for these businesses. Banks continue to provide commercial finance in the form of commercial mortgage loans, lines of credit, and commercial real estate loans.
Despite the current regulatory changes and encouragement from the Federal Reserve, there is still very little cooperation among banks to make commercial mortgages more available to small business owners. Many bankers believe that the only way that they will be able to increase commercial mortgage loan funding is to change the way that they do business themselves. For example, many bankers believe that small business owners will not be receptive to the offers of bank loans if they are presented in the form of unsubsidized business loans. This would require banks to “risk” their loans by charging higher interest rates or issuing overly aggressive loan conditions.
Many financial experts believe that this is simply not going to happen. “The last thing the banking industry needs is another shot of crisis, even when the crisis they created in 2020 is coming to an end,” said Stephen Finau, Executive Vice-President of BankFirst Mortgage. “They already weakened the small businesses by making it harder for them to obtain a mortgage. Now they are going to make it even harder to work with small businesses.” Finau continued, “The only people that will benefit from this are unscrupulous business brokers.”
However, the fact remains that the changes that are occurring within the banking industry are providing some small business owners with some benefits. The changes are resulting in a new atmosphere where commercial loans are more competitive and more accessible to business owners. This competitive environment will enable small business owners to get commercial loans at better rates and more affordable terms. In addition, the resulting tighter credit requirements are lowering the costs and fees that business owners pay for loans.
The changes to small business loans that are currently being implemented should benefit every type of business. They have the potential to save small businesses from the brink of financial ruin and to keep small business owners from being repeatedly denied loans. With all of the bad press that the business industry has recently been receiving, any positive changes to lending should be welcomed. However, these positive changes do come with a warning – the crisis is ongoing, and the changes are temporary.
The positive changes to lending will not be available immediately. As news of the crisis spreads and as more lenders are forced to tighten their belts financially, small business financing may become even more difficult to secure. However, the news does provide a glimmer of light at the end of the tunnel. While small business owners still must face tough times financially, the positive changes do represent a chance to get a loan while the crisis remains manageable.