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. Because of the recent ineffectiveness that continues to prevail with commercial banking, obtaining commercial mortgage loans can no longer be taken for granted by small businesses. Small business borrowers are increasingly likely to have less resources and leverage than large corporations when negotiating with any bank.
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. One key result of the changes and challenges involving commercial mortgages is that effective commercial real estate financing is becoming harder to find. 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. Nevertheless that is a likely funding scenario that currently confronts business borrowers everywhere. To make this challenge even more difficult, very few commercial lenders are providing a candid assessment of their inability to provide commercial mortgage financing 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.
We previously published a companion piece describing the need to get back to basics with working capital financing. The points made in that article are directly relevant to this discussion in terms of the growing challenges with commercial refinancing. Even though a small business owner might feel that they can obtain needed cash by refinancing an existing commercial mortgage loan in which they have substantial equity, any current effort to refinance a business loan is likely to be much more difficult than expected. When commercial real estate refinancing cannot be obtained, commercial borrowers should consider a working capital loan as a secondary solution.
A reduced amount of leverage for most small business loans is another “new basic” that seems likely to become a permanent fixture for commercial mortgage loans. Needing larger down payments to buy a business will be one result for borrowers. Commercial debt refinancing will be more difficult because of the reduced leverage, especially when combined with decreasing commercial real estate values currently being experienced on a widespread basis.
The most challenging aspect in commercial borrowers reacquainting themselves with the “basics” for commercial mortgage loans is likely to be the need to not only focus on the “old basics” but also on numerous “new basics” created by a massive shift in commercial loan services. 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.
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