Commercial construction financing and commercial real estate loans are presenting a number of new challenges for commercial borrowers. As a result, small business owners should anticipate that they are likely to encounter some new but generally avoidable problems when they are seeking working capital funding and commercial mortgages.

There have always been complex problems for business owners to avoid when seeking commercial loans. By most accounts, these difficulties are now expected to multiply because we appear to be entering a period which will be characterized by even more uncertainties in the economy. Prior standards for commercial mortgages are likely to change suddenly and with little advance notice by lenders if the current financial turmoil continues.

For commercial borrowers seeking stated income commercial loans and commercial mortgages, there have been dramatic changes during the past year. These changes have resulted in more restrictive availability and terms for small business loans based upon stated income underwriting. Very few traditional lenders are currently using a stated income process (no income verification, no tax returns, no IRS Form 4506) for their commercial real estate loans and other commercial financing.

This development is strongly-based on problems which occurred with residential mortgage financing using a stated income approach for borrowers. Whenever there is a financial crisis, lenders rightfully attempt to apply lessons learned to other business areas. In this case, the many loan defaults which occurred with stated income residential financing provide a practical rationale for lenders to reduce or eliminate stated income commercial mortgages.

One major lender which had been offering stated income business financing as well as full documentation commercial loans suddenly stopped making small business mortgages of all sizes and types. While it is clear that this particular lender had a variety of financial problems, their decision to completely exit the commercial mortgage business came as a surprise to most and has already resulted in both direct and indirect impacts at other commercial lenders.

It is always advisable to have a detailed understanding of what can go wrong with commercial loans and working capital financing. The five factors described can have negative and long-lasting financial results for small business loans and commercial real estate loans. Business owners should be prepared for these real possibilities.

Most commercial borrowers do not want to experience a worst case for commercial real estate loans and small business loans. There are several elements that we believe will almost always produce this serious but avoidable result when they are all present simultaneously. Understanding each of the issues should enable borrowers to avoid a potentially devastating working capital financing outcome.

Here are the issues which we believe will usually result in a worst case scenario for commercial loans if all five are present: