Commercial Loan Options

The Importance of Plan B Contingency Financing for Commercial Loans

by Stephen A. Bush

Summary: Many business owners are aware of the importance of having a Plan B, but in spite of such awareness, the practical value of a contingency plan is often overlooked when arranging commercial mortgage loans, business cash advances and working capital financing.

Please review "AN IMPORTANT REMINDER" at the end of the commercial loan report below.

Contingency planning ("always have a Plan B") will help small business owners avoid many complex problems. But when it comes to commercial loans and commercial mortgages, working capital strategies often fail to include adequate attention to contingency plans that anticipate what can go wrong with business financing.

One of the most effective and entertaining portrayals of contingency planning is a movie called "Rare Birds". This movie stars William Hurt and includes variations of the line, "Always have a Plan B". For any business owner who doubts the practical value of contingency plans, the movie will provide a relevant perspective. A contingency plan concept for business financing has been one of the core themes for AEX Commercial Financing Group in successfully completing especially difficult variations of commercial loans.

Contingency planning might be under-utilized when business owners are seeking commercial mortgages, business cash advances and other forms of business financing simply because business borrowers assume that there are not effective alternatives to the commercial financing they are seeking. As a result, many business owners might believe that it would not make sense to explore a contingency finance plan. An enduring benefit of viewing the recommended movie is that 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 business insurance to protect a commercial borrower in the event that something goes wrong with their working capital financing. A few examples are provided below.

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

In most instances, very little advance notice has been provided. 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 a business owner can suddenly lose 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 most effective Plan B approach occurs before business finance arrangements are finalized.

Fourth, many lenders for commercial mortgages, SBA loans and business opportunity financing 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 examples described above as well as many other possibilities where contingency planning is appropriate for commercial loans and working capital loans. Being committed to a Plan B mentality is likely to contribute to many aspects of running a successful small business in addition to business financing.

AN IMPORTANT REMINDER — Like any good plan, contingency plans for working capital and commercial loans must be periodically reviewed and updated to remain effective.