Small Business Financing and Mixed Signals

Small business financing and working capital loans are producing mixed signals for commercial borrowers. These mixed signals are due to a variety of financial and economic issues, but the end result is likely to be confusion for small business owners. Business lenders are increasingly reducing or canceling commercial lines of credit, turning down new requests for business financing and declining to refinance commercial real estate loans. In contrast to their actual lending practices, most lenders have announced that they are lending normally to businesses.

Looking at this perplexing situation from a lending perspective, it is likely that most commercial lenders truly want to be more active in providing small business financing programs than they currently are. Many banks have been forced to increase their liquid assets to satisfy government standards because they are overcapitalized. In most cases, this literally forces such lenders to make fewer loans and to cancel some existing loans. In other cases, lenders have depended excessively on short-term commercial financing sources and now find themselves short of capital to make loans because their own business funding sources are proving to be inadequate.

Having enough cash flow to support daily operational requirements is a critical need from the perspective of a small business owner. The inability to borrow needed funds on an ongoing basis will quickly produce serious consequences for any business because very few businesses are debt-free. The average business owner probably does not understand why they cannot get adequate working capital or commercial real estate financing from their existing bank. The primary mission for commercial borrowers is likely to involve locating new sources of capital once they realize that their current lenders might not be up to the task of helping their business financially.

Because there appears to be an adequate supply of new lending sources to fill the void left by the exit of many banks and other lenders from commercial lending, there is good news emerging from this confusing and complicated lending climate for small businesses. A prominent commercial lender recently announced that they needed more capital in order to continue making small business loans. It has become clear that there are other lending sources sufficient for solving the immediate problem, recognizing that the failure of this lender would be an inconvenience to businesses using their services.

Despite the confusion and mixed signals from lenders, business owners are in better shape than they probably realize to make it through the current small business financing chaos. In order to increase the chances of their business surviving, borrowers should take a more active role in working capital management.