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Working Capital Loans and Plan B Contingency Financing
Contingency planning (“always have a plan B”) is likely to help small business owners avoid complex problems. But when it comes to commercial loans and commercial mortgages, working capital strategies often fail to pay adequate attention to contingency plans and what can go wrong.
One of the most effective and entertaining representations of emergency planning is a movie called “Rare Birds”. This movie (starring William Hurt) includes variations of the “Always have a plan B” line. For any business owner who doubts the importance of contingency plans, the film will offer an illuminating perspective.
Commercial borrowers often assume that there is no effective alternative to the commercial financing they seek. As a result, many business owners might believe it would not make sense to explore an emergency financing plan. If you’ve seen the recommended film, it will become second nature to realize at times like this that companies should “always have a plan B.”
Plan B emergency business financing should be viewed as insurance to protect a business owner in the event of a problem in managing their working capital. Some examples are provided below.
First, a surprising number of local and regional banks have recently decided to remove future business financing from their loan portfolio.
When they do, very little notice has been provided in most cases. If a business has commercial loans or commercial mortgages with a regional or local lender, a Plan B should be developed for the eventuality that other business loan arrangements may be required in the near future.
Second, many small businesses have commercial loans that contain recall provisions that allow the lender to review the loan each year.
In this case, the lender could continue to play a commercial finance role for certain borrowers, but will selectively eliminate what it considers to be marginal loans by exercising the call clause. If they do, the borrower will have to repay the entire loan or refinance within a limited time. One of the most troubling aspects of these features is that the borrower loses control even though they may have made their payments on time. The best way to avoid this possibility is to review current business loans and explore Plan B refinancing options if call back conditions are included.
Third, many business cash advance providers are notorious for making unrealistic promises regarding payment terms and terms.
To prepare for this possibility, business owners should engage in thorough discussions with a prospective business finance advisor before proceeding. Unlike the first two examples, in this case the Plan B approach occurs before financial arrangements are finalized.
Fourth, many lenders for commercial mortgages, business opportunity financing, and SBA loans are also guilty of over-promising and under-delivering.
This problem seems to occur disproportionately with regional and local banks. Similar to the approach recommended for business cash advances, commercial borrowers should pursue Plan B emergency financing. The ideal time to discuss other commercial financing options is before committing to a specific lender.
“Always have a plan B” is certainly intended to be the connecting theme for the four examples mentioned above as well as the many other possibilities where contingency planning is appropriate for working capital loans and business loans. The usefulness of a plan B mentality is likely to help many aspects of running a successful small business. For a variety of reasons, however, contingency planning appears to be underutilized when business owners seek commercial mortgages, business cash advances, and other forms of business financing.
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