Commercial Real Estate Loans and Plan B
To help commercial property owners and businesses avoid difficulties, contingency planning (”always have a Plan B”) should help. Business finance strategies often do not devote enough attention to contingency plans and what can go wrong with small business loans and working capital loans.
An entertaining movie which is probably one of the most effective depictions of contingency planning is “Rare Birds”. William Hurt is the star of this movie which includes several timely variations of the warning, “Always have a Plan B”. By watching the movie, an enlightening perspective will be provided to most business owners who might doubt the importance of contingency planning.
For a successful business, a Plan B mentality should be helpful to many business operations and not just financial ones. For various reasons, however, contingency planning appears to be under-utilized when business owners are seeking new commercial financing such as working capital financing and commercial mortgages.
Unfortunately many commercial borrowers probably (wrongly) assume that there are not realistic alternatives to the commercial mortgage they need. In such a case, it might not make sense for a business owner to pursue contingency financing plans. If you have seen the recommended movie, it will become second nature to realize at times like this that businesses should “Always have a Plan B” regardless of whether it seems to be a waste of time or not.
Plan B contingency commercial financing can be thought of as like insurance which will cover a business if their existing financing fails. Provided below are two examples.
First, many local and regional banks are pulling the plug on business financing and business debt refinancing. When banks recall loans, they usually do so with little advance notice. A Plan B should be developed for the contingency that alternative business loan arrangements could be needed if a business has commercial loans or commercial mortgages with a regional or local lender.
Second, lenders have added recall provisions to many loans that allow them to review the agreement annually (in most cases). Lenders can selectively eliminate what they consider to be marginal loans by exercising the recall clause while they continue business financing for other borrowers. Within a limited period of time, the borrower will be required to refinance or payoff the entire loan if the lender exercises their recall provision. If the lender recalls the loan, the borrower will effectively lose all control even if they have been making timely payments. If recall terms are included, a suggested solution for avoiding this possibility is to review current business loans and explore Plan B refinancing options.
Finally, for the two examples noted above as well as the numerous other possibilities where contingency planning is appropriate for commercial real estate loans and working capital loans, here is a closing thought. “Everyone should have a Plan B”.