Commercial Loans - Good Banks and Bad Banks

The use of terms like "good banks" and "bad banks" is probably causing confusion for small business owners in their search for viable sources of commercial loans and working capital. Nevertheless most observers would readily agree that banks have changed during the past few years, and astute commercial borrowers understand that they must quickly adapt so that their future business finance funding does not suffer. For many businesses, commercial finance consulting has emerged as a helpful tool to sort out which banks are still reliable. In addition to the critical importance of identifying "good banks", we have published a related report which describes the delicate issue confronting many business owners who might need to fire their banker. Just as there are "good banks" and "bad banks", there are also "good bankers" and "bad bankers".

One of the more confounding issues associated with the "bad bank and good bank" analysis is that there are so many competing explanations as to what constitutes a "bad bank". One perspective has focused on how much banks are worth in view of the toxic loans that are often so hard to value, and "bad banks" are those whose assets are estimated to be worth less than their liabilities and as a result have been referred to by such colorful terms as "dead banks walking" or "zombie banks".

We are not likely to encounter a bank which has openly agreed that they deserve to be looked at as a zombie bank or dead bank walking because their liabilities exceed their assets since this would amount to calling themselves a bankrupt bank. Although there are a number of banks which might appear to be functionally bankrupt, the current banking laws do not permit such a bank to go through the kind of bankruptcy process being weighed by General Motors. The FDIC (Federal Deposit Insurance Corporation) is required by law to immediately assume the operation of any bankrupt bank until a new management and ownership arrangement can be established. For a number of smaller banks, this has in fact occurred during the past few months.

The reason that the Federal Deposit Insurance Corporation has not also liquidated larger problematic banks has not been made public. One possibility is that the FDIC simply does not currently have sufficient assets to cover the failure of a big bank. This viewpoint is supported by the recent announcement that the FDIC is in the process of raising fees paid by banks in order to replenish the Federal Deposit Insurance Corporation insurance funds. Another obvious possibility is the belief by the FDIC and key public officials that the public failure of a major bank would create a crisis of confidence for all other banks regardless of financial health.

In the face of confusing political decisions and conflicting discussions, small business owners need their own reliable evaluation standards to determine what constitutes either a "good bank" or "bad bank". This should include a results-oriented assessment of which banks can provide the needed working capital and commercial loan help for their specific business circumstances. Of course, the banks themselves are not likely to be overly candid in providing the needed data to produce this critical analysis. After all, there could be several bankrupt banks still operating normally because they have not rushed to advise the public that they are in serious trouble. While banks are actively proclaiming that they are making business loans in a normal fashion, most banks have actually reduced their commercial lending dramatically.

Our candid final point is that the use of a business finance consultant should be considered by commercial borrowers in their search for new working capital funding and commercial real estate financing. Businesses should now act more aggressively than might have been necessary in recent years in order to protect their own financial interests. In evaluating the Bernie Madoff fiasco, one of the common questions raised is why investment advisors repeatedly failed to ask basic questions prior to placing investor funds with Madoff. Commercial finance consulting has emerged as an important tool to help small business owners work their way through a complicated commercial banking maze and avoid the kind of regrets exposed by the Madoff scandal when preliminary questions were not asked at the appropriate time.

Commercial Loans
Evaluation of effective and reliable sources for commercial loans and working capital financing.