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What Is a Bailout Plan?

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  • Written By: K.C. Bruning
  • Edited By: John Allen
  • Last Modified Date: 16 September 2016
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A bailout plan is the distribution of a loan or gift of money to an entity that is on the verge of financial failure. This can be done for an individual, an organization, or even a government. The handout may save the entity, but it may also only be meant to manage the effect of an impending failure so that it does not cause too much collateral damage.

There are several different reasons a bailout may be given. Some individuals or organizations may see investing in the failing entity as a potentially lucrative move. Other entities, such as large companies or governments may pursue a bailout plan in order to protect their own interests. There may also be donors who would offer a bailout for philanthropic reasons.

A government bailout plan may be instituted in order to save a particular industry that is deemed to be vital to the health of the economy. These kinds of plans tend to have the most widespread effect as they have an impact on not only governments overall, but job security and tax payers. A typical argument for a government-funded industry bailout is that it can help to avoid recession. Arguments against government bailouts include fears of lower risk management due to the perceived existence of a safety net and the potentially excessive involvement of government in corporate interests.

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Large companies may offer a bailout plan to vendors or other related organizations. This is often due to the company’s reliance on the services, supplies, or other assets of the struggling company. It could also be because the failure of the company could have a detrimental effect on the industry of the company offering the bailout, whether or not it is the same as that of the struggling entity.

Some investors will offer a bailout plan to a struggling entity in order to make a profit. These parties are often considered to be predatory, as they are generally looking to buy into the entity at an extremely low cost and profit from its failure. This action may save a business, but it will also typically lower its potential profitability or overall value.

A bailout plan may also be offered to an entity by an individual or organization with philanthropic intent. In this kind of situation, the resources and assets of the entity may be retooled to offer a similar service for different purposes. Assistance may also be offered to help the entity recover and attempt to attain its original status.

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