Small Business Finance

There were both positive and negative developments for business loans during 2007. These will have an immediate impact on business financing strategies for borrowers.

When reviewing commercial loan developments that occurred during the past 12-18 months, there are mixed results when looking at the best and worst trends. Many of the working capital changes that emerged last year have important ramifications for borrowers refinancing or seeking new financing.

A major commercial property investment trend has been some increasing activity due to the current decline in viable residential investing options. This seems to be particularly true for business opportunity situations which do not have a real estate component, an aspect of increasing importance to investors who want to avoid property ownership at this time.

For business cash advance and credit card processing services, the past 12 months have been characterized by significant changes. There were many providers both entering and exiting these business activities. It is of course good news that some ineffective providers were forced to leave this specialized working capital management service area. But the bad news is that there are still many new and inexperienced companies attempting to operate in this complex field.

A similar trend involving inexperience can be seen in viewing the large number of residential financing brokers now attempting to transition into business financing. Since by some estimates well over 100,000 residential financing employees lost their jobs during 2007, there is a real possibility that thousands of unqualified brokers will be entering the business finance field during 2008 or have already started the process.

A general business loan trend impacting refinancing is the reduction in loan-to-value ratios, especially when borrowers are attempting to get some of their equity out of the business in cash. For purchase situations including special purpose properties such as church financing, slightly larger down payment requirements are increasingly more common.

During 2007 there was also noticeable attrition in SBA loan providers. This is primarily a positive development, since the field has long been overpopulated with inadequate business lenders.

Likewise many local and regional banks visibly reduced or eliminated their business financing activities during the past 12 months. The bad news about this trend is that very few former commercial lenders provided their borrowers with adequate notification of their intent to exit the business. If there is a positive aspect to this development it is probably that many borrowers confronted with the need to suddenly find alternative commercial financing sources have often ended up with much better terms by dealing with a new lender that specializes in commercial real estate financing and working capital management.

Although the general decrease in interest rates during the past year is a positive development, there will probably be some confusion among commercial borrowers who have adjustable rate terms when they do not see their rates reduced. In all likelihood, this will be due to a common clause applied to most commercial loan contracts that stipulate that the minimum rate for such agreements will never be less than the initial rate. With such a floor rate provision, this means that if a borrower starts with an adjustable rate set at 10% and then rates fall, the effective loan rate will remain at the initial rate.

By: Steve Bush