The need for small business owners to be prepared for an extremely difficult commercial lending environment is a primary emphasis in this discussion about “getting back to basics” for commercial real estate loans. Obtaining commercial real estate financing can no longer be taken for granted by small businesses because of the recent ineffectiveness that continues to prevail with commercial banking. Large corporations continue to have much more leverage than small business borrowers when it comes to bank loan negotiations.
Very few banks have followed through on the assurances to return to a “normal” level of lending once they received bailout funding despite the apparent conclusion that the government bailouts helped to keep them operating. Effective commercial real estate financing is harder to find, and this has emerged as one key result of the changes and challenges involving commercial mortgages. This observation applies equally to new commercial loans for buying a business and commercial refinancing efforts. A dramatic reduction in the number of banks providing this kind of financing to small businesses is one inescapable “new basic” for commercial real estate loans. It will frequently be even more difficult to secure a commercial mortgage from a new and unfamiliar lender if the current bank for a business is not willing to help. This undesirable business funding situation is currently confronting commercial borrowers on a widespread basis. To make this challenge even more difficult, very few commercial lenders are providing a candid assessment of their inability to provide commercial mortgage financing and working capital finance for a wide variety of small businesses. In a particularly annoying (and growing) trend, banks are not generally being straightforward in telling prospective commercial borrowers when they have reduced their commercial loan activities.
The need to get back to basics with working capital financing was previously published in a companion piece. In terms of the growing challenges with commercial refinancing, the main points made in that article are directly relevant to this discussion. Any current effort to refinance a business loan is likely to be much more difficult than expected even when a small business owner is certain that they can obtain needed cash by refinancing an existing commercial mortgage loan in which they have substantial equity. Commercial borrowers should consider a working capital loan as a secondary solution when commercial real estate refinancing cannot be obtained.
Another “new basic” that seems likely to become a regular fixture for commercial mortgage loans and small business finance services is a reduced amount of leverage for most small business loans. One immediate impact for borrowers is needing a larger down payment to buy a business. Especially when combined with decreasing commercial real estate values currently being experienced on a widespread basis, commercial debt refinancing will be more difficult because of the reduced leverage.
The need to not only focus on the “old basics” but also on a series of “new basics” created by the massive shift in business loan services might be the most challenging aspect for commercial borrowers reacquainting themselves with the “basics” for commercial mortgage loans. There have been surprising difficulties and changes for small business financing, and this is particularly illustrated by the current commercial banking climate for commercial mortgages. Because the issues currently impacting commercial real estate loans are so widespread and effecting business borrowers everywhere, it is appropriate for business owners to “get back to basics” before they finalize any new business loans.
