The Importance of Plan B for Commercial Mortgages
Commercial Real Estate Financing Help
This overview is designed to provide candid and practical help for business owners wanting to obtain or refinance commercial mortgage loans. Small businesses can realize cost savings by taking a few prudent actions to improve their financial agreements. Commercial real estate financing has become increasingly complex and difficult, so even the most experienced business owner should expect to need some specialized help when arranging either a new or existing commercial property loan. One of the biggest challenges is to avoid "bad banks" and to fully evaluate lending candidates that appear to be "good banks."
Plan B Contingency Planning
The Importance of Having a "Plan B"
Contingency planning ("always have a Plan B") is likely to help commercial property owners and small businesses avoid complex problems. Commercial finance strategies often fail to include adequate attention to contingency plans and what can go wrong when it comes to commercial financing.
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 funding for their company. This is probably due to excessive confidence in a company's primary lender. But almost all banks have changed during the past decade, especially in their lending practices to small businesses.
Formulating a Plan B does not mean that there is already a problem to be solved. Instead the rationale for contingency planning is to establish what to do when and if something does go wrong. For example, "What should I do if my banker calls me next month to inform me that the bank no longer will finance my commercial loan?"
The logic of having a contingency plan B already in place for this kind of possibility is that banks rarely provide any advance warning that they are about to pull the plug on a small business loan. Once they have done so, the time period for a commercial borrower finding another lending source will depend upon the written loan agreement. A period as short as 30 to 90 days is not uncommon. In today's chaotic banking circumstances, this will be difficult (if not impossible) unless a new funding source has already been identified.
Most small business owners should find a Plan B for commercial mortgage loans.
For small businesses, it is becoming more clear every week that commercial mortgage loans are now (much) harder to either obtain for a purchase or refinancing. Zombie banks are one of the key underlying problems that makes having a Plan B so important.
The Current Status of Small Business Mortgage Lending
There have been many reports about the lack of adequate commercial lending from banks to small businesses during the past several years. This challenging problem continues to exist for most commercial real estate loans to smaller companies throughout the U.S. If a commercial borrower cannot obtain a commercial property loan to either buy or refinance from their local bank, they should explore whether financing help is available from other business lending sources.
A Poll - Please Express Your Opinion!
During the past four years, most banks have effectively stopped making normal commercial real estate loans (including refinancing) to small businesses.
Some of the questions that most small business owners should be asking are the following:
- Will I need to fire my banker?
- Where are commercial loans available for small businesses?
- What should I do when my bank repeatedly says "No" to normal requests?
- What are "Zombie Banks?"
- How can I reduce business debt?
- Are the terms of commercial mortgages negotiable?
What should I do when my bank repeatedly says No?
The Title of This Book Says It All
Ironically, this book was written well before the most recent banking crisis and was primarily about the savings and loan scandal of the 1980s. But the book certainly foreshadowed what was to come, and the bank bailouts of 2008 represented yet another form of bank robbery. Just repeat the title of the book out loud and you might have a “Eureka!” moment about banks.
Respect and Trust: Are These Words Becoming Extinct in Banking?
When you think of bankers and banks, how likely are you to use the words "respect" and "trust?" We all want to be able to use those words when we are talking about banking, but the comfort in doing so has been missing for a few years.
I think the turning point for many of us was when William K. Black wrote his superb book with a title that says it all:
The Best Way to Rob a Bank Is to Own One
Don't Forget About Plan B!
Contingency plans are likely to help small businesses avoid complex problems with most aspects of business operations. Remember to devote adequate attention to contingency planning and what can go wrong when it comes to business loans of any kind — Always Have a Plan B.
One More Thing - Refinancing
- As problematic as getting a commercial mortgage to buy a business and the accompanying commercial property is, the need for genuine heavy lifting is found when small business owners attempt to refinance their loans. Commercial borrowers are repeatedly discovering that their current bank is no longer interested in refinancing a commercial real estate loan despite a lengthy and excellent payment history in combination with healthy positive cash flow. (And yes, this is yet another timely example that illustrates the immense value of having a Plan B!)
Decreasing or Eliminating Debt
With the growing difficulties surrounding commercial real estate loans, the wisdom of using less debt (or no debt) should be evaluated carefully by small business owners.
Is There a Problem with Banks?
If "Banks are the problem, not the solution", don't you owe it to yourself to learn more about what is going on and how it might impact you? This book provides a big step in that direction.
When Did These Problems Start? When Will They End?
In my opinion, the "Patient Zero" point of the financial health crisis was 1999 when the Glass-Steagall Act was repealed by Congress. This was important legislation passed during the 1930s to prevent banks from taking inappropriate risks. Once this legal barrier was removed, it didn't take long for financial institutions to begin playing around with exotic (and very risky) investments like financial derivatives.
I began to see very clear signs that something was changing in the way that banks were lending to small businesses in the 2005-2006 period. For most people, glaring signs appeared during 2007-2008.
I have previously published my forecast of when I expect the current banking crisis to end, and I currently see no reason to change it: when the legal protections of the Glass-Steagall Act are restored. Because the banking lobby now has near total control of Congress, I effectively do not see this happening at all until yet another and more serious crisis forces this kind of bank intervention. I'm not holding my breath for this to happen.
The best way to rob a bank is to own one.— William K. Black
© 2009 Stephen Bush