Mixed Signals and Confusion about Small Business Financing from Banks
- Mixed Signals about Bank Financing for Small Businesses — A Brief Introduction
The use of "mixed signals" as a descriptive phrase is likely to indicate elements of confusion, lack of clarity, disharmony, variance and occasionally deception. It is difficult to imagine this specific description having a positive connotation, particularly in a competitive business world where the mere appearance of confusion or deception can be devastating. With this in mind, it is striking to see how often "mixed signals" or similar words have been used to describe current financial and banking events (based on a recent online search). Because the actions and words of many banks and financial companies are currently at odds with each other, the use of "mixed signals" seems to be accurate and appropriate, especially when viewed through the lens of business owners and commercial borrowers.
The use of "mixed signals" is applied generously in describing the world of politics. The most common example of "mixed signals" for a politician is typically portrayed by conflicting statements made in different speeches (or by comparisons of a political platform and legislation introduced later). As banking corporations become more intertwined with the world of politics, it should probably come as no surprise that "mixed signals" as a description is now as relevant to the financial world as it is to the political world.
- "Normal Business Lending" — A New Normal?
Working capital loans, commercial mortgages and almost all other variations of small business financing are becoming harder to obtain and commercial lenders are sending mixed signals to borrowers. Many banks are cutting or canceling business credit lines, refusing to refinance commercial real estate financing and declining new requests for business financing. In contrast to such lending activity reductions, it is common to hear lenders announce that they are lending normally to businesses. 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.
From the perspective of lenders, it is probable that most banks want to be more actively providing small business loan programs than they currently can. However, many banks are under-capitalized and have been forced to increase their liquid assets to satisfy government standards. This unfortunately forces such banks to cancel some existing loans and to make fewer new 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.
- Planning Strategies for Results-Oriented Action
Planning strategies are increasingly needed for bank financing. Having enough cash flow to support daily operational requirements is a critical need from the perspective of a small business owner. Very few businesses are debt-free, and the inability to borrow needed funds on an ongoing basis will quickly produce serious consequences. The average business owner probably does not understand why they cannot currently get adequate working capital or commercial mortgage loans from their existing bank. However, once commercial borrowers realize that their current lenders might not be able to help their business at this time, their primary mission is likely to involve locating new sources of capital. "Doing nothing" is not likely to emerge as a viable alternative for a small business owner focused on the survival of their business.
The good news emerging from this complicated and confusing lending climate for small businesses is that 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. Recently a large small business lender declared that they needed more capital from either the government or their current investors in order to continue a prominent role in making commercial loans to small businesses. Even though the failure of this lender would be inconvenient to businesses using their services, it has become clear that there are indeed other lending sources sufficient for solving the problem.
Most business owners will be able to make it through the current commercial funding chaos in spite of mixed signals from commercial lenders. In order to increase the chances of their business surviving, borrowers should be prepared to take a more personal and active role in the commercial finance needs of their business.
- To Fire or Not to Fire (Your Bank)
In the end, mixed signals regarding small business financing can produce several outcomes. As already noted, when banks provide mixed signals about making commercial loans, a major result is confusion among small business owners. The final decision for a commercial borrower impacted by the mixed signals will of course vary based on individual circumstances. But among the difficult issues to be weighed in the decision-making process is likely to be whether it is feasible to find a new source for commercial financing.
Due to mixed signals as well as other factors, many commercial borrowers are now reluctantly admitting that banks are just not what they used to be. In a manner similar to many automobile manufacturers that are now a tarnished and shriveled version of what they once were, it seems like almost overnight most banks have lost the confidence of their borrowers. In this shifting reality, business owners are now forced to adapt quickly to a changing environment for small business financing. Even if their commercial banker is their best friend, small business owners are increasingly realizing that they must look out for their own best interests because their business banker might not be up to the task anymore.
While this assessment might seem cold and harsh, it is nevertheless a candid and practical evaluation of current circumstances. Unwinding a long-term relationship with a particular bank or banker is likely to produce some of the same trauma that occurs when any positive relationship suddenly goes sour. In the end, all parties will hopefully try to do the best that they can and then move forward. As in any change-related decision, the decision-maker (in this case, the business owner agonizing over the firing of their bank) should openly evaluate the probable consequences of not changing at all. If they are being truthful to themselves, most business owners will conclude that they should seek a new bank if keeping the old bank is holding their business back, either by bad advice or inadequate small business financing.
- There are Still Good Banks and Good Bankers
These observations are in no way meant to suggest that all banks are now bad or that all bankers are now bad. In today's complex economy, there are still good banks as well as bad banks. Similarly, there are also good bankers and bad bankers. The true nightmare scenario to confront for most commercial borrowers is when their current banking relationship involves a bad banker working for a bad bank.
A few years ago a key marketing executive for a major automobile manufacturer revealed that one of the biggest fears in their marketing efforts was exemplified by the loss of so many previous customers who proceeded to buy a competitor's car without giving the original dealer any explanation. In other words, the customers did not tell the previous dealer that they had a serious problem or complaint. They just left and went to the competition (perhaps after receiving "mixed signals").
Copyright © 2014, Stephen Bush. All rights reserved. AEX Commercial Financing Group