Even under marketing and production contracts with established price bases, quality discounts and premiums can cause uncertainty. But the most frequent error is one that occurs when borrowers and lenders actually believe they are addressing the issue, and that is when they evaluate the effect of standard scenarios such as a 10 or 25 percent decrease in revenues. For some businesses this practice overstates the risk involved, while for others it may seriously understate potential risks. The alternative outcomes considered should reflect the business's actual historical performance variability, as well as the range of current forecasts. No commercial lender wants to enter a situation in which foreclosure is the only alternative if things do not go as planned.
Contingency planning is critical.
Every plan should have a backup plan and every entry strategy should have an exit strategy. This latter point is particularly true where niche markets are involved. There are several factors to consider here. The first is to recognize that a viable net worth is not anything above zero. Most commercial lenders require some minimum equity position, e.g. 30 percent, below which they will not continue financing without an external guarantee.