Small Business Loans and Working Capital Financing
A Worst Case Alert
by Stephen A. Bush
It is important to have an understanding of what can go wrong with small business loans and working capital financing. The unique combination of factors noted below can have particularly negative financial results for commercial loans and commercial real estate financing. Business owners should be prepared in advance for these problematic circumstances so that they can develop contingency plans.
I recently published a separate report about the importance of contingency planning for business financing and business cash advances. "Always have a Plan B" is a theme AEX Commercial Financing Group has advocated in our commercial loan advice for many years.
The primary purpose of this article is to focus on a particular combination of business loan and commercial mortgage problems which usually produce immediate and major negative consequences.
Like the perfect storm, the worst case scenario for borrowers seeking commercial loans is not an event that most people will want to actually experience. There are several elements that we believe will usually produce this negative result when they are present simultaneously. Understanding each of the issues should enable borrowers to avoid a potentially devastating working capital funding outcome.
Here are the five issues which we believe will usually result in a worst case scenario for small business financing if all factors are present:
1 — Dealing with an inexperienced business financing advisor
2 — Obtaining commercial loans that include a lender recall option
3 — Unacceptable lender track record for successful commercial financing
4 — Non-competitive business loan terms
5 — Borrowers cannot choose longer-term financing
I have prepared separate detailed reports that discuss each underlying factor. It is important to note that there are likely to be many business finance scenarios where it will be impractical to avoid all of the issues described above. Our primary advice is to focus on avoiding circumstances where all five factors are present. A secondary recommendation is to also seek alternative financing for commercial real estate loans and commercial loans when either the first or third elements are present. Two points deserve particular emphasis.
First, the worst case scenario for commercial loans described above is completely avoidable.
But if you want to avoid an obstacle, it is critical that you have a working understanding of what you are avoiding, what it looks like and any special techniques required to evade it. For example, if you are driving a car, it is common sense that you will not intentionally drive your vehicle over sharp pointed objects that are likely to puncture your tires.
With commercial loans, the combination of the five factors noted above will typically produce an impact that is equivalent to much worse than simply puncturing a tire. Unfortunately, without proper information, most business owners will not be prepared to recognize the appropriate warning signs that will enable them to avoid serious commercial financing hazards.
Second, most business financing is more complex than borrowers expect.
There are a number of other potential commercial loan problems beyond those noted in this article. Because of this, it is important for commercial borrowers not to narrowly focus on the factors included in the worst case scenario discussed here. In other words, it is not enough to simply avoid these five specific issues. A comprehensive approach to small business loans should incorporate a balanced analysis of both the worst case aspects and other key commercial funding issues.
