Small Business Financing and Commercial Loans - Worst Case Alert
It is important to have an understanding of what can go wrong with commercial loans and small business financing. The unique combination of factors noted below can have particularly negative financial results for business loans and commercial real estate loans. Business owners should be prepared in advance for these problematic circumstances so that they can develop contingency plans.
The primary purpose of this article is to focus on a particular combination of commercial loan and commercial mortgage financing problems with immediate and major negative consequences.
It is important for commercial borrowers to realize that there are also a multitude of other serious problems with business loans which borrowers should have a similar awareness of in order to avoid unnecessary complications.
Like the perfect storm, the worst case scenario for borrowers seeking working capital financing and 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 commercial funding outcome.
Here are the issues which we believe will usually result in a worst case scenario for small business loans if all five are present:
1 — Using a lender which has an unacceptable track record for successful business financing
2 — Dealing with an inexperienced commercial loan advisor
3 — Obtaining business loans that include a recall option for the lender
4 — Short-term financing which a borrower is not permitted to lengthen to a longer-term
5 — Non-competitive loan terms
We have prepared separate detailed reports that discuss each underlying factor.
There are likely to be many commercial finance scenarios where it will be impractical to avoid all of the issues described above. 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 commercial loans and commercial real estate financing when either of the first two elements are present.
It is important for business owners to secure business financing which is not impacted by the worst case conditions. It is not our intent to raise a red flag without suggesting a path for minimizing the potentially problematic circumstances summarized above. Two points deserve particular emphasis.
First, the worst case scenario for 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 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 serious business financing hazards.
Second, commercial financing is more complex than most borrowers realize.
There are a number of additional serious commercial loan 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 commercial real estate loans and other small business loans should incorporate a balanced analysis of both the worst case aspects and other critical commercial funding terms.
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