Small Business Loans and Bank Rage

“Banking establishments are more dangerous than standing armies.”

(Thomas Jefferson)

 An Introduction to Bank Rage

Small business loans are currently proving to be problematic for many business owners. The small business financing difficulties are a growing concern for commercial property owners, and the scarcity of commercial loans has evolved to a boiling point that has many commercial borrowers angry. But, as illustrated by the Thomas Jefferson quote, there have been anger issues directed toward banks for several centuries. While the purpose of this article is not to evaluate the historical evolution of rage directed at banks, it does seem appropriate to at least acknowledge that we have been there before.

“You may have to fight a battle more than once to win it.”

(Margaret Thatcher)

 A Perfect Storm Amplifies Bank Rage

The current examples of bank rage by commercial property owners have characteristics of a perfect storm because of several events occurring in close proximity to one another:

• Many banks received billions of dollars to keep funds flowing to businesses and individuals, while the opposite seems to be the actual immediate result.
• Multiple banks have used scarce resources to acquire competitive banking institutions at discounted prices while at the same time they have reduced their commercial lending activities.
• Very few banks have made significant progress in renegotiating terms of residential mortgages already in default, thus increasing the likelihood of even more foreclosures.
• While U.S. banks have been allowed to borrow funds from the Federal Reserve at a near-zero cost, the rates charged by banks when they are lending to both individuals and businesses have gone up rather than down in almost all cases.

With events such as those just noted becoming public knowledge, it should come as no surprise to anyone that bank rage is emerging as a practical issue for business financing and small business owners. Several components underlying this widespread bank rage are described in the following paragraphs. There are also some realistic business finance and commercial refinancing solutions for business owners to consider, and one of these options will be briefly described.

 A Starting Point: Banks Have Changed

“When the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well.”

(New York Attorney General Andrew Cuomo)

A good starting point for understanding bank rage is the observation that small business owners are rapidly discovering firsthand that banks are not what they used to be. Because of economic turbulence, many small business owners are now finding that they genuinely need commercial financing or business loan refinancing help for the first time in a generation. A revision in how banks are able to take risks is a major underlying factor for this very real small business problem. Small businesses have generally received commercial loans involving a reasonable amount of risk for the lender, but from most accounts such business loans are no longer a routine occurrence. Due to changes in legal guidelines, the primary risk-taking activities for most banks typically do not involve small businesses but instead opportunities offering the bank a higher profit potential. A key example is how many banks over-leveraged their balance sheets to invest in portfolios of risky residential mortgages only to discover that investments do not always go up in value. Because they are either worthless or it will be a long time before anyone could sell them at a break-even value, these investments are now usually referred to as toxic assets.

 No Way to Run a Bank

To update the Ronald Reagan quote about government solving problems, the current perspective might be — “Banks are not the solution to our problem. They ARE the problem.”

A substantial portion of the current bank rage can be attributed to the results of scrutinizing how banks are using their scarce resources. Many well-known banks are paying million-dollar salaries and bonuses to employees who have already taken their employers to the brink of disaster rather than using their scarce resources for traditional uses like working capital management for small business owners and commercial property owners. Typically paying as little as three cents on the dollar in cash and leveraging the remainder with debt, banks which should have known better unwisely invested in multiple varieties of what are now referred to as toxic assets. The true source of money invested in toxic assets is probably capital provided by bank depositors and shareholders. In what has to be seen as an outrage to almost everyone, even after banks have reported losing billions of dollars as a result of toxic asset transactions, they have repeatedly paid out billions of dollars to employees responsible for those worthless investments. Realistically most will point out that this is no way to run a bank.

In perhaps the most astonishing update about banks taking unwarranted risks, it was recently reported (September 28, 2009) that over 1000 banks are currently trading in risky derivatives (an INCREASE compared to one year ago). It is clear that the bankers themselves continue to argue that they are not engaging in risky behavior. However, since the "Great Recession" credit chaos and the fall of Lehman Brothers, AIG and countless other financial companies can all be realistically attributed to financial institutions making risky (and losing) bets with derivatives, most innocent bystanders (taxpayers, business owners, retirees and future retirees — in other words, everyone stands to lose when banks make big mistakes) are hoping for the reckless banking behavior to stop.

Legal changes that set the stage for banks taking more financial risks were put into motion by the Gramm-Leach-Bliley Act (November 12, 1999). This legislation removed bank restrictions originally imposed by the Glass-Steagall Act of 1933 (which was designed to prevent bank abuses). As a direct result of the 1999 legislation, U.S. banks were legally permitted to take financial risks that were previously prohibited. Not all banks assumed an inappropriate amount of risk, but many did and the entire U.S. economy is suffering as a result. Based on reports from the Federal Deposit Insurance Corporation, the number of banks which meet FDIC criteria to be called a troubled bank has grown from just under 100 in the first quarter of 2008 to over 400 in the third quarter of 2009.

“When you’re using lots of debt, the difference between genius and idiocy can be a matter of luck and timing.”

(Daniel Gross, Newsweek, September 14 2009)

Meanwhile, the few remaining good banks have effectively been victimized by the outlandish behavior of the many bad banks. For purposes of this brief comment, the most practical commercial finance and business refinancing solution which should be actively evaluated by most small businesses is determining whether their current banking relationship involves one of the bad banks or one of the good banks. Moving forward and getting beyond the prevailing bank rage is a worthy goal for any small business owner. Small businesses should be prepared to look out for their own best financial interests and realize that firing their banker might be the most appropriate course to follow.

 Where to Learn More

“It’s what you learn after you know it all that counts.”

(John Wooden)

For business owners seeking to learn more about any problems they are experiencing with small business loans and working capital financing, there are a number of resources which will describe critical business finance issues in more detail. Here are two examples of business financing resources which might be helpful — both are published by AEX Commercial Financing Group (owned and managed by Stephen Bush) and are available online at no cost:

• The Commercial Loans and Commercial Mortgages Guide — this guide provides advice pertinent to commercial real estate loans.
• The Working Capital Guide — this resource provides advice primarily related to short-term working capital management.

 About the Author

Stephen Bush is the Founder and Chief Executive Officer of AEX Commercial Financing Group (based in Ohio). Steve is a graduate of Miami University (Oxford, Ohio) and obtained an MBA from the University of California, Los Angeles. He has worked with small business owners for over 25 years. Steve has also served as an officer in the U.S. Navy Supply Corps and as a business/government advisor. AEX provides business loans, commercial real estate financing, business cash advances, working capital management and small business consulting throughout the United States.