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Business Finance Funding and Avoiding Dead Banks Walking

By Stephen Bush

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Published: 24Mar2009
Word count: 624
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In the world of business finance funding, the colorful terms "Zombie Banks" and "Dead Banks Walking" have been applied recently to a number of commercial lenders. Although these discussions have an element of humor and entertainment, there is a practical aspect to them as well. Ultimately it is not likely to be in the best interest of a business owner to have extensive involvement with any of the banks which these terms describe accurately. In any case it should be beneficial for commercial borrowers to understand what constitutes a zombie bank and what they should do if they are working with a dead bank walking.

For any business owner currently needing a commercial loan or working capital financing, the concept of "Dead Banks Walking" is likely to be an essential part of their decision. This description has been used by several sources recently, all with a similar reference point of banks which have already gone broke. This critical but apparently accurate assessment is largely derived from a straightforward net worth approach. Such an analysis recognizes that many banks have substantial assets which are either worthless or at least worth well below the values reflected on their books, with the resulting real current value being less than the current debts of many banks.

Based on the evaluation of many observers who have realistically reviewed current asset values, most of the largest banks in the United States been shown to be worth even less than Lehman Brothers (which is already in bankruptcy). To compound their public relations nightmare, many banks have shown poor business judgment in how they spend money and make commercial loans. If a bank is already worthless, it certainly calls into question how businesses and commercial borrowers will benefit by the government throwing money at these "zombie banks" in the first place. This controversy has been fueled by the failure of most banks to increase their commercial lending to business owners after receiving government bailout funds. The apparent result so far has preserved the solvency of banks (for the time being) by giving them cash which most are hoarding rather than actually improving liquidity by increasing commercial finance funding to businesses.

This raises several questions. Overall there is an emerging consensus that giving otherwise bankrupt companies (the zombie banks) more operating cash does little beyond covering the payroll for the dead banks walking.

First, are these ostensibly worthless banks really too large to fail? For those suggesting that there would be a crisis of confidence if the three or four largest banks in the United States were taken over because they are insolvent, there appears to be a growing majority of the public which would suggest that these banks have already lost too much good faith to ever recover.

Second, is there a better way to solve the problem than giving insolvent banks more money? George Soros and others have recently described in detail how other banking systems have successfully handled mortgage financing. This is a critical point because residential and commercial real estate loans are widely agreed to be at the heart of the current problem, but so far there is no real effort underway to change the failed process.

Third, can business owners really afford to wait for the government to solve this problem? Although waiting a few weeks or even several months might be viable for a practical solution which results in needed commercial loans, the current logjam impacting business finance funding shows little evidence of subsiding that quickly. Prudent commercial borrowers should seek alternative sources for essential working capital financing such as business cash advances. In case it is not obvious from the discussion above, dead banks walking and zombie banks can be avoided when seeking new commercial financing.

Learn how to avoid mistakes for commercial loans and commercial real estate loans - Steve Bush is a working capital finance expert => AEX Business Cash Advances and Commercial Mortgages

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