The Potential for Malpractice with Small Business Loans

During the opening segment of the television series Hill Street Blues, Sergeant Phil Esterhaus usually ended with a suggestion ("Let's be careful out there!") that will also be helpful in avoiding malpractice situations involving working capital financing. Although that is a worthy goal, the actual practice of avoiding problems with small business commercial loans is somewhat difficult and complex. One of our most effective solutions for this dilemma has been to openly acknowledge that such difficulties exist and simultaneously provide detailed advice and strategies.

Most commercial borrowers are probably aware that chaotic conditions have impacted residential real estate. This has produced problems for commercial borrowers since it has resulted in numerous former residential lenders and brokers now attempting to execute small business loans because their previous residential lending activities have all but dried up.

As you might imagine, inexperience involving small business loans is never a good thing when you are describing a commercial lender or broker. What borrowers need to be acutely aware of is that inexperience coupled with the complexity of commercial loans is likely to result in a recipe for business finance malpractice in many cases.

Even though a broker or lender was superb at executing residential mortgage financing, please do not assume that they will also be good or even marginally capable when it comes to commercial mortgages, small business loans or working capital financing. We have prepared a series of reports which focus on over 20 critical differences between business financing and residential financing. In reality it takes years to master commercial loans.

Most of these agents represent only providers for business cash advances and simply do not understand business loans in general. They are focused on only the narrow but important service that they provide and are not capable of assisting with other forms of commercial finance.

The malpractice potential with business cash advances is also directly related to the first example described above involving inexperienced brokers and lenders. In many cases throughout the U.S., call centers that previously focused on residential real estate loans have simply switched their focus to merchant cash advance programs. Once again inexperience is never a good thing when complicated working capital management services are involved.

Although many commercial lenders represent that they offer SBA financing, in reality very few do what they claim. One major commercial financing lender ceased most business operations during the past year because of apparently fraudulent SBA loan activities.

Specialized commercial property such as gas stations, funeral homes, bowling alleys and golf courses have always been recognized as problematic for small business commercial loans. For example, one prominent provider of funeral home financing is the subject of multiple lawsuits regarding their irresponsible commercial funding activities.

Commercial borrowers should rightfully conclude that an important step in avoiding potential malpractice circumstances is simply to avoid certain lenders and brokers. We would agree wholeheartedly, and in fact AEX published a special report some time ago dealing with the need to avoid problem commercial lenders and brokers.

As serious as the illustrations of malpractice described above are, they are truly just the tip of the iceberg when analyzing potential obstacles for small business loans and working capital loans. Our advice is meant to reinforce the importance and value of being prudent in pursuing small business commercial loans.