The Working Capital Journal

Business Loan Help

We continue to project that the rapidly-changing environment for small business financing and working capital loans will involve a series of new but avoidable problems for business owners. As these challenges evolve, AEX Commercial Financing Group is committed to helping in any way that we can.

There have always been complex problems for business owners to avoid when seeking commercial loans, and AEX Commercial Financing Group has been at the forefront of ongoing efforts to publicize and explain these difficulties to commercial borrowers. By most accounts (including our own), we are entering a period which will be characterized by more uncertainties in the economy. Previous rules and standards for small business financing are likely to increasingly change quickly — with little (if any) advance notice by commercial lenders.

With the current realization that substantial changes are likely in the near future for commercial finance funding throughout the United States, AEX plans to continue a steadfast role in analyzing what is happening and what to do about it. Some of our past efforts have focused on the following:

• Contingency Planning for Business Finance Funding

• Commercial Mortgages - Why Banks Say No

• Increased Commercial Loan Misinformation

• Commercial Lenders to Avoid

• Avoiding Malpractice with Commercial Finance Funding

• Problems to Avoid With Business Cash Advances

Our current efforts will focus on a discussion of actions being taken by commercial lenders. Unfortunately we have already witnessed a number of controversial and disappointing responses by business lenders to recent economic circumstances. Our intent is to highlight as many of these questionable tactics as possible with at least two goals in mind:

• To prepare business owners for what is happening and what might happen.

• To illustrate questionable bank-lender practices with the hope of reducing or eliminating them.

We encourage business owners and their advisors to contact us for more details or to describe their own experiences to us so that we can share their lessons learned with a broad audience.

Contact Information

AEX Commercial Financing Group

Stephen Bush

Chief Executive Officer

Phone: (937) 780-4030

Email: BUSH@AEXLLC.COM

PO Box 353, Leesburg OH 45135-0353 USA

Bank Line of Credit Programs — Working Capital Loans

PLEASE NOTE — While our reporting summarized below might seem to include a significant number of disturbing and negative business financing practices, our primary point is precisely that there ARE more commercial finance problems than most business borrowers are likely to realize until they observe accounts like this one. More importantly, many (if not most) of these problems are either SOLVABLE or AVOIDABLE with appropriate action taken by business owners. As one key example, there are NEW and EFFECTIVE programs which can provide SHORT-TERM WORKING CAPITAL to many businesses. Some of these options are described below and elsewhere within The Working Capital Journal. For any business owner needing help obtaining either short term financing or long-term commercial loans, please contact AEX Commercial Financing Group immediately (contact information shown above).

Some of the most drastic measures taken recently by banks involve reductions and cancellations of business lines of credit. One of the most publicized examples was the early December 2008 closing of Republic Windows and Doors in Chicago after Bank of America cancelled the company's line of credit. This resulted in the immediate loss of about 250 jobs. A more obscure aspect of this same event was that Republic was also trying to buy (for cash) American Water Seal in Orrville, Ohio but Bank of America chose to liquidate the company instead, resulting in the loss of another 100 jobs. In response to the sudden closing of the Chicago plant, workers engaged in a sit-in protest and the State of Illinois threatened to terminate their financial activities with Bank of America. Of special note to most observers regarding this and related examples of Bank of America reducing commercial loans is that Bank of America has already received a multi-billion dollar cash infusion from U.S. taxpayer money that was intended to facilitate the lending of money to businesses and consumers.

Many small business owners also rely on personal lines of credit to finance some of their business operations. We have received many reports of widespread cancellations and reductions of these lending programs as well, especially those involving Citigroup (operating as Citi). Like Bank of America, Citigroup has also received a multi-billion dollar cash infusion from U.S. taxpayer money that was intended to facilitate the lending of money to businesses and consumers.

In many cases, business and personal lines of credit have been eliminated by lenders (Bank of America and Citigroup are not the only banks doing this) because of deteriorating business conditions and a reduced ability to pay by borrowers. However, our reporting data indicates that for the majority of line of credit cancellations or reductions, the borrowers had an excellent payment history.

Meanwhile — we have seen several banks that are willing to make working capital loans. The most notable examples are (for the most part, anyway) NOT banks which have received bailout funds. In general, these responsible commercial lenders have been willing to provide working capital funding, either in the form of new business financing or refinancing lines of credit and term loans which have been recalled or cancelled by lenders such as Bank of America. As might be expected, such commercial finance funding is primarily limited to businesses which (1) are current in their debt obligation payments and (2) are showing a profit based on recent financial statements. (For business owners that meet these two conditions and need business finance funding, please contact AEX Commercial Financing Group for immediate help.)

The pattern described above is very disturbing to most observers because it basically indicates that bailout funds have been given (so far) to lenders who primarily have a history of making bad loans (Citigroup, Bank of America, and virtually all other lenders receiving bailout funds to date). At this point, little attention has been given to lenders with a healthy balance sheet in federal attempts to get more funds into the hands of consumers and businesses.

Conclusions so far:

1. Businesses need to increasingly prepare for life without relying on a traditional bank line of credit and instead use other viable sources of financing such as business cash advance programs.
2. The U.S. Government should stop giving taxpayer funds to lenders such as Bank of America and Citigroup until and unless it is clear (in very specific terms) how funds will actually be successfully and effectively loaned to businesses and individuals. In these troubled times, reducing and cancelling lines of credit as opposed to extending and increasing lines of credit should immediately disqualify a lender from receiving additional taxpayer funds. Furthermore, the recent unwillingness by most lenders receiving bailout funds to report in any meaningful way how and where these funds have been used would certainly seem to be a loud and clear signal that these particular lenders are probably in worse shape than they are reporting to anyone. They should be treated on the same level as auto manufacturers and be required to provide a detailed plan about how they plan to get funds into the hands of consumers and businesses. (As a lender, they would certainly require this level of detail from a prospective borrower by requiring a business plan and other operational details.)
   
3. Commercial borrowers should immediately contact their U.S. Senators and Congressional Representatives with feedback about their dealings with lenders. Irresponsible lending practices will need to be addressed by legislative and regulatory action.
4. Federal officials should immediately reconsider which lenders will receive future funding. In our view, future government funds should be primarily restricted to banks and other lenders which have a history of making good loans rather than bad loans.
   

Commercial Construction Loans

With very few exceptions, we are finding that financing for commercial construction projects is not currently available. We previously published a business finance funding report about the difficulty of obtaining commercial construction financing, so "limited availability" of construction-related loans is not surprising based on what we already have seen. What represents a new development is that virtually all business construction funding sources are effectively inactive at this time in addressing new loan requests.

Credit Cards — Predatory Lending at its Worst

We are including comments about credit cards because numerous small business owners have increasingly been forced to rely on cash obtained via credit cards to sustain their businesses, in many cases because commercial lenders have cancelled or reduced their business line of credit (see above discussion: Bank Line of Credit Programs — Working Capital Loans). In most cases, banks are rapidly doing with credit cards what they have already done with commercial lines of credit, namely cancel and reduce credit lines even when borrowers have an excellent payment history. The rationale for banks reducing both business lines of credit and credit card lines of credit is quite similar: banks most likely fear that massive defaults are now very possible, and in both cases they have no collateral to fall back on since these lending approaches are both on an unsecured basis (unlike home loans in which the real property is pledged as collateral).

We referred to predatory lending in the title for this section because unfortunately we are observing that banks throughout the United States are routinely raising interest rates to 25% and higher, even for those with an excellent payment history. Banks are taking advantage of a currently-permissible (i.e., legal but not necessarily ethical) concept usually referred to as “Universal Default” which legally allows them to reduce lines of credit and raise interest rates even with perfect payment histories if “external” information indicates the possibility of default. But our reference to predatory lending is intended to reflect much more than interest rates charged — multiple daily harassing phone calls, not advising customers about hardship payment plans when adversity causes payments to fall behind, and generally NOT acting as if “We’re all in this together”. We can’t help but note (and applaud) the current marketing approach being used by Hyundai in which they arguably have made “We’re all in this together” an effective slogan to reflect their willingness to take back a purchased car if the buyer loses their income during the subsequent 12 months. While there might be fine print details which make the Hyundai offer less of a risk to them, their actions still reflect an apparently genuine attempt to share the burden when adversity strikes.

On a somewhat similar note for credit cards, we have heard reports indicating that some banks have been willing to extend hardship payment plans which reflect low interest rates (0% to 4% in several instances). This is not charity, and the rationale for their doing so is to avoid moving credit card accounts to an inactive status in which they would be receiving no payments — for example, if a credit card holder applies for a liquidation bankruptcy, the bank in many cases will end up with no future payments at all. Just as Hyundai wants to sell more cars by offering a program that will allow buyers to return cars in select situations, banks willing to accept interest rates as low as zero recognize that this will eventually allow them to receive at least the principal amount of the loan rather than incurring a total loss. Nevertheless, the elements contained in a “We’re all in this together” approach to either selling cars or getting loans paid in full appear to be increasingly important for the current economic turmoil.

However, there is very little to currently indicate that the major credit card issuers have anyone’s interest but their own in mind. Certainly the reports we have received to date indicate that banks such as Chase would win our newly-established “Worst Bank in the World” award based on their use of harassing phone calls alone. We couldn’t believe how many daily phone calls the major credit card issuers were really making to delinquent accounts until we received MANY similar reports. The real eye-opener was hearing that this is being done as soon as an account is as little as one-day late. For most reports, the high-volume harassing calls begin shortly after missing one payment, and in most cases not much more than a $100 payment or so is sufficient to merit a truly unbelievable barrage of phone calls (and based on multiple reports, these calls continue even after verbal and/or written communication from account holders to credit card issuers detailing a variety of hardship conditions resulting in inability to make regular payments). Capital One is very similar to Chase in their relentless use of the telephone to harass their customers. If we had an award for poorest current communication efforts with borrowers (in what most rational parties would acknowledge is an especially tough time for virtually all average families), Chase would win the gold medal, Capital One would get the silver and Bank of America, Citi (Citigroup), American Express, U.S. Bank and HSBC are currently in a close contest for the bronze. From what we’ve been told, the primary reason that Chase Bank and Capital One would be in a tight competition for this special award is due to their relentless number of calls, reportedly 80-90 calls per week to home phones and another 60-70 calls to business phone numbers. “We’re all in this together” does not apparently include Chase Bank, Capital One, Bank of America, HSBC, American Express, U.S. Bank, Citi and the rest of the credit card harassment gang …..

Conclusions so far:

1. Based on how most banks are acting, it appears that the potential financial crisis that banks apparently fear due to credit card defaults could easily dwarf the current crisis tied largely to delinquent mortgages and foreclosures. There does not appear to be consistently dependable and accurate reporting by banks regarding what percentage of credit card accounts are currently in default. We believe a conservative estimate would be something in excess of the percentage of home loans which are not current in their payments — depending on locations and economic circumstances, even this conservative number can be substantial since in some of these locations (Ohio, for instance), some estimates suggest that as many as 15% to 20% of home loans are not current. For two reasons, it is difficult to assume a direct correlation between home loan defaults and credit card defaults: (a) Although an average individual will have just one home, it is not unusual for that same individual to have more than one credit card. (b) Many individuals who do not own a house do have one or more credit cards. However, most observers feel that individuals are more likely to keep home loan payments current in comparison to credit cards because it is a secured loan.
2. The biggest issuers of credit cards understandably have the most to lose, and somewhat unsurprisingly these are primarily the same banks which are exhibiting various characteristics of predatory lending practices noted above. Please note that we do not currently contact lenders for comments when we receive reports from business owners, but we hope to do so in the future as time permits while we proceed with our study (and also remember that we are doing this on an unpaid basis, so economic limitations will also prevail in what we can realistically do). We have received multiple negative reports regarding the credit card lending practices for the following (in no particular order): Capital One, Citi, Bank of America, American Express, U.S. Bank, HSBC and Chase (we will add further banks as they are justified by the reports we receive from commercial borrowers and consumers).
3. One of the lending practices which resulted in excessive loan problems for residential lending was the use of “stated income” in which lenders did not require any verification of a borrower’s income prior to making a home loan. This has also proven to be a problem for commercial loans made by business lenders. The use of stated income has traditionally been how most banks issuing credit cards have qualified their applicants. A loan underwriting approach based upon stated income is faster and cheaper for a lender — it also results in an increased probability of inappropriate loan approvals based upon reported income that does not exist (which of course contributes to predatory lending because most lenders don’t really know what amount of credit card loans are appropriate in most cases). The increasing discomfort by lenders in relying upon a borrower’s “stated income” is a large part of the rationale for banks currently reducing their future exposure to credit card financing.
4. For some positive news: There are a few financial institutions which appear to be more than holding their own and which are not guilty of the criticisms noted here — the most notable of these is USAA (based in San Antonio, Texas and primarily serving members with current or past military service backgrounds). It should be noted that I (Stephen Bush, CEO of AEX Commercial Financing Group) am a former military officer (U.S. Navy) and have been a member of USAA for over 35 years — this company has consistently acted responsibly and ethically during my entire experience with them. I hope to be able to report other such positive examples as I move forward with this ongoing report.
5. The malicious way that MOST credit card issuers are communicating with delinquent accounts after missing due dates by as little as one day is deserving of new and much stricter guidelines for the credit card industry. As we have seen by the massive losses generated by the recent bank bailout fiasco, the biggest banks are for the most part incapable of governing their own behavior with a true measure of ethics and responsibility. To offer a specific starting point and recommendation, we strongly hope that harassing phone communication practices that are aggressively used by Chase, Capital One, American Express, U.S. Bank, Bank of America, HSBC and several other key parties will be condemned more consistently and publicly by all concerned. Since such questionable behavior is likely to continue in the absence of strict penalties, it is also hoped that new legislation will treat both the practices noted here as well as other unacceptable practices as criminal violations. In the meantime, don’t hold your breath waiting for American Express, U.S. Bank, Chase, Citi, Bank of America, HSBC, Capital One et al to act as if “We’re all in this together”.
   

Business Cash Advance Programs — Working Capital Advances — NEW Short-term Working Capital Options

One of the few bright spots in commercial financing recently has been the continuing effectiveness of business cash advances to obtain working capital quickly. For most businesses accepting credit cards, this commercial finance funding approach should be actively considered. This is especially true because most banks are doing a terrible job of providing commercial loans and other business finance funding in the midst of recent financial and economic uncertainties — business cash advance programs are literally saving the day for many commercial borrowers. Depending on the monthly volume of credit card processing for a qualifying business, a working capital advance will typically vary from $10,000 to $300,000 — but it is important to realize that there a number of problems to avoid with merchant cash advance programs, and we have previously published a detailed summary of these avoidable factors in The Working Capital Journal (please see “Business Cash Advances” in the right-hand column). Commercial borrowers should not hesitate to contact AEX to discuss this important short term financing option.

Because merchant cash advances are not practical for all business owners, it is important to note that there are also new working capital financing alternatives. A key disadvantage of business cash advances is that they can be used only by businesses which accept credit cards from customers. One new short-term working capital program from AEX Commercial Financing Group is available to businesses which are paid primarily by cash and checks (this short-term small business financing program is also available to businesses which primarily accept credit cards). This particular option offered by AEX is less costly than business cash advance programs and in many cases provides a longer payback period for working capital loans.