The Potential for Malpractice With Commercial Loans

By: Stephen Bush

Malpractice in any activity typically occurs when there is a serious failure of professional duty. With borrowers seeking small business loans and commercial real estate financing, malpractice can occur with both commercial lenders and brokers for commercial 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 business 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.

We have published a special report addressing one of the biggest recent causes of malpractice involving business financing and commercial real estate loans. Most commercial borrowers are probably aware that chaotic conditions started impacting residential real estate beginning about 12 months ago. Because their accustomed level of residential financing activities have all but disappeared, former residential brokers and lenders are in many cases now executing business loans. As you might imagine, this can result in problems for commercial borrowers.

Inexperience involving commercial loans is never a good thing when you are describing a commercial lender or broker. In almost all cases the complexity of business loans combined with inexperience by their financing advisors can result in a formula for malpractice.

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, working capital financing or small business loans. We have prepared a series of reports which focus on over twenty critical differences between residential financing and business financing. It really does take several years to be effective in finalizing commercial loans.

Another common source of malpractice with working capital financing is currently seen with many agents for business cash advance programs. The typical agent acts as a representative of a credit card receivables financing provider and does not comprehend the complexities of business loans. They are focused on only the narrow but important service that they provide and are not capable of assisting with other forms of business financing.

Although it might not be obvious to most business owners, the malpractice potential with business cash advances is also directly related to the first example described above involving inexperienced brokers and lenders. Throughout the U.S. we have seen call centers switching from a focus on residential financing to merchant cash advances. Once again inexperience is never a good thing when complicated working capital management services are involved.

Specialized commercial real estate loans and SBA loans represent the final example of malpractice potential. Although many commercial lenders seem to suggest that they can do SBA financing, in reality very few do what they claim. One major business financing lender ceased most business operations during the past year because of apparently fraudulent SBA loan activities.

Specialized commercial property such as funeral homes, gas stations, bowling alleys and golf courses have always been recognized as problematic for commercial loans. As a relevant example, a national lender for funeral home loans is now the target of litigation due to commercial funding activities that almost anyone would view as irresponsible.

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

No matter how serious the three malpractice examples might be, they should be considered as the tip of the iceberg when looking at the overall obstacles for working capital loans and business loans. Our advice is meant to reinforce the importance and value of being prudent in pursuing commercial loans.

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