Small Business Management

Mike Smith seeks your counsel about a problem that has grown out of a decision he made three years earlier to buy a warehouse. Up until then, he had rented three warehouses, where he stored containers and did pick-and-pack for retailers importing goods from abroad. Figuring it was time to consolidate, Smith found a building, negotiated a price of $3.5 million, put down $300,000, and borrowed $3.2 million from a bank at 7 percent interest.

It seemed like a good idea at the time. Then a recession hit. As his sales dropped, he struggled to make his monthly payment of $27,000. At present, he's behind in his payments and scared. Furthermore, the situation seems unlikely to improve anytime soon. To make matters worse, he signed a personal guarantee on the loan and thinks he might lose his house. The bank is assessing the situation to decide what to do.

In a panic, Smith tells you, "I'm going to tell the bank I need eight months. It can take the money I'll owe for that time, plus what I owe now, and tack it onto the end of the mortgage. What do you think?"

"How do you know that's what the bank is looking for?" you ask.

"I have to offer them something," Smith says. "My wife and I could lose everything!"

"You aren't going to lose everything," you say, "and you're making a mistake to assume that you know what the bank wants."

Questions:

1. Why did this happen and what might have Smith done to avoid this situation?

2. What guidance will you give Smith in negotiating with the bank?

3. Why might you advise him not to go into a meeting with bank officers with a plan already in mind?

4. If Smith could do something that is unethical to save his business and avoid a financial disaster, should he?