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In spite of the questionable commercial banking practices illustrated below, there are some realistic and practical business financing solutions available to small business owners. The emphasis here is focusing on the problems rather than the solutions primarily because of the lingering notion by some that there are not significant current commercial lending problems. Objective observers (which probably do not include most politicians and lenders) are almost unanimous that the series of errors made by business lenders are likely to be long-lasting for business borrowers in their ongoing efforts to obtain small business financing.

Small business owners will be more likely to avoid serious future business finance problems with working capital management and commercial real estate loans by exploring what went wrong with business financing and commercial lending. Especially if they need help finding realistic small business finance options, this is a critical issue for most commercial borrowers.

An ongoing problem is illustrated by misleading lender statements about their small business financing activities. Although banks have typically been reporting that they are lending normally with their small business financing, the actual results indicate something very different by any objective standard. From a public relations viewpoint, it is clear that banks would rather not admit publicly that they are not lending normally. As a result of this particular issue alone, small business owners will need to be cautious and skeptical in their attempts to secure business financing.

Commercial bankers routinely lost sight of a basic investment principle that asset valuations will not always increase and in fact can decrease quickly. Many commercial loans were made in which there was little or no equity by the business borrower. Banks invested almost nothing in cash (as little as three cents on the dollar) when buying future toxic assets. The apparent assumption was that if any downward fluctuation in value occurred, it would be a token three to five percent. In fact we have now seen many commercial real estate values decrease by 40 to 50 percent during the past two years. For banks which made the original commercial mortgage loans on such business properties, commercial real estate is proving to be the next toxic asset on their balance sheets. In contrast to the government bailouts to banks having toxic assets based on non-performing residential loans, it is unlikely that banks will receive similar financial assistance to cover commercial mortgage problems. Such commercial real estate financing losses could produce serious problems for banks and other lenders over the next three years. Many commercial lenders have effectively stopped any meaningful small business financing despite ongoing concern and criticism about current reduced business lending activity.

When making loans or buying securities such as those now referred to as toxic assets, there were many instances in which banks failed to look at cash flow. An underwriting process known as stated income in which commercial borrower tax returns were not required was used for some small business finance programs. One of the most prominent business lenders aggressively using this approach was Lehman Brothers (which filed for bankruptcy due to a number of questionable financial dealings).

Greed seems to be a common theme for several of the most serious business finance mistakes made by many lending institutions. Unsurprising negative results were generated by the attempt to produce quick profits and higher-than-normal returns. The only people seemingly surprised by the devastating losses are the bankers themselves. The largest small business lender in the United States (CIT Group) declared bankruptcy after two years of attempting to get someone else to pay for their mistakes. By most accounts many of the largest banks should have been permitted to fail but were instead kept afloat by government bailouts, and even after that experience we are still seeing a record level of bank failures. Commercial lenders made serious mistakes by almost any standard used to evaluate them, and according to a popular phrase, if business lenders and business owners forget these mistakes, they are doomed to repeat them in the future.