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 include adequate attention to contingency plans and what can go wrong.

One of the most effective and entertaining depictions of contingency planning is a movie called “Rare Birds”. This movie (starring William Hurt) includes variations of the line, “Always have a Plan B”. For any business owner who doubts the importance of contingency plans, the movie will provide an enlightening perspective.

Commercial borrowers often assume that there are not effective alternatives to the business financing they are seeking. As a result, many business owners might believe that it would not make sense to explore a contingency finance plan. If you have seen the recommended movie, it will become second nature to realize at times like this that businesses should “Always have a Plan B”.

Plan B contingency commercial financing should be viewed as insurance to protect a business owner in the event that something goes wrong with their working capital management. A few examples are provided below.

First, a surprising number of local and regional banks have recently decided to pull the plug on future business financing in their lending portfolio.

When they do so, very little advance notice has been provided in most instances. If a business has commercial loans or commercial mortgages with a regional or local lender, a Plan B should be developed for the contingency that alternative business loan arrangements could be needed in the near future.

Second, many small businesses have commercial loans that contain recall provisions that permit the lender to review the loan each year.

In this instance, the lender might continue a business financing role for some borrowers but will selectively eliminate what they consider to be marginal loans by exercising the recall clause. If they do, the borrower will need to pay off the entire loan or refinance within a limited period of time. One of the most disturbing aspects of these features is that the borrower loses all control even though they might have been making payments on time. The best solution for avoiding this possibility is to review current business loans and explore Plan B refinancing options if recall terms are included.

Third, many providers for business cash advances are notorious for making unrealistic promises regarding timing and payment terms.

To prepare for this possibility, business owners should engage in thorough discussions with a prospective business financing advisor before proceeding. Unlike the first two examples, in this case the Plan B approach occurs before finance arrangements are finalized.

Fourth, many lenders for commercial mortgages, business opportunity financing and SBA loans are equally guilty of over-promising and under-delivering.

This problem seems to occur disproportionately with regional and local banks. Similar to the recommended approach for business cash advances, commercial borrowers should pursue Plan B contingency financing. The ideal timing to discuss alternative 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 noted above as well as the numerous other possibilities where contingency planning is appropriate for working capital loans and commercial loans. The usefulness of a Plan B mentality is likely to be helpful to many aspects of running a successful small business. For various reasons, however, contingency planning appears to be under-utilized when business owners are seeking commercial mortgages, business cash advances and other forms of business financing.

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