Commercial Loans and Small Business Financing

Commercial Loans and Small Business Financing
By Stephen Bush

The worst case scenario for borrowers seeking commercial real estate loans and business financing is a situation that must be avoided if at all possible. The focus of this small business advisory article is on five avoidable situations involving working capital finance and commercial loans that will have the most severe financial consequences for business owners.
It is important to have an understanding of what can go wrong with small business commercial loans and working capital financing. Business owners should be prepared in advance for these problematic circumstances so that they can develop contingency plans. The unique combination of factors noted below can have particularly negative financial results for business financing and commercial real estate financing. Like the perfect storm, the worst case scenario for borrowers seeking commercial loans and working capital 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 small business 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 historically has an unacceptable track record for successfully completing business financing; (2) Dealing with an inexperienced working capital financing advisor; (3) Obtaining commercial loans that include a recall option for the lender; (4) Short-term financing in which a borrower is not given the opportunity to lengthen to a longer-term period; and (5) Non-competitive loan terms. We have prepared separate detailed reports that discuss each underlying factor.

There are likely to be many commercial funding 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 commercial 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 loans and commercial real estate 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 working capital financing hazards.

Second, working capital management 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. The primary purpose of this article was to focus on a particular combination of working capital and commercial real estate mortgage financing problems with immediate and major negative consequences. There are a multitude of other serious problems with commercial loans which borrowers should have a similar awareness of in order to avoid unnecessary complications.

Taken From: Buzzle

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