Much like the perfect storm, the worst case scenario for borrowers seeking commercial real estate loans and small business loans is not a situation that most people should want to actually experience. There are several elements that we believe will almost always produce this serious but avoidable result when they are all present simultaneously. Understanding each of the issues should enable borrowers to avoid a potentially devastating commercial funding outcome.
We have prepared separate reports that discuss each underlying factor in detail. Here are the issues which we believe will usually result in a worst case scenario for commercial loans if all five are present:
(1) Using a lender which historically has an unacceptable track record for successfully completing commercial loans;
(2) Dealing with an inexperienced commercial finance advisor;
(3) Obtaining business financing that includes a recall option for the lender;
(4) Short-term financing in which a borrower is not also offered the opportunity to lengthen to a longer-term period; and
(5) Inappropriate and non-competitive loan terms.
There are likely to be many business financing scenarios where it will be impractical to avoid all of the issues described in the preceding paragraph. Our primary advice is to totally avoid circumstances where all five factors exist at the same time. A secondary recommendation is to also seek alternative financing for small business loans and commercial real estate loans when either of the first two elements are present.
It is clearly not our intent to raise a red flag without suggesting a path for minimizing the potentially problematic circumstances summarized above. It is important for business owners to secure commercial financing which is not impacted by the worst case conditions. Two points deserve special emphasis.
First is our observation that the worst case scenario for small business loans described above is totally 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 real estate loans and commercial loans, the combination of the five factors noted previously in this article will typically produce an impact for small business funding that is equivalent to much worse than simply puncturing a tire. Unfortunately, without proper advice and knowledge, most business owners will not be prepared to recognize the appropriate warning signs for avoiding business financing hazards.
Our second point to emphasize is that small business loans are more complex than most borrowers realize. There are a number of additional serious commercial funding obstacles beyond those noted in this brief 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 and simply avoid these specific issues. A comprehensive approach to working capital management should incorporate a balanced analysis of both the worst case aspects and other critical business finance terms.
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