A commercial loan modification, also known as a business loan modification, restructures an existing loan to make it more feasible for the borrower to continue making payments. In most cases, this option is a last resort if the borrower cannot refinance the loan through another lender.
If the loan is going into default or the borrower falls behind on the monthly payments with no way to catch up, a loan modification may be the only option. A modification usually reduces the monthly payments for a loan.
It may also reduce the interest rate so the borrower can more easily meet the monthly payment requirements. This can give the borrower some breathing room, but it does not necessarily lower the total amount due.
The revenue lost through lower monthly payments is recouped by extending the life of the loan. This means the lender can charge interest over a longer period of time. With a loan modification, the borrower may pay more in the long run.
Requesting a Loan Modification
If you or your business cannot meet the financial obligations of a business loan, you may seek a loan modification. To obtain one, contact an attorney familiar with loan modification, a settlement company or a loan modification company specializing in negotiating the restructuring of business loans.
All these entities work to reduce the monthly payments on the existing loan, negotiating a lower payment so your business can meet its monthly obligations without over-extending itself in the short term. While you can request a modification on your own, it is risky unless you have a strong business, legal and financial background.
Are you eligible for a business loan modification?
Not every commercial loan can be modified. Before going through the process of a loan modification, research whether you are eligible for one. Review your documents and look for anything referring to modification.
If there is a reference to a specific loan modification process, you can request one from your loan provider. If there is not a specific process outlined in the document, negotiating a possible change to the terms of the loan may be more difficult.
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In general, commercial loans can be modified if:
- The loan is more than 60 days past due.
- Foreclosure on the business is not in progress.
- The borrower has not filed for bankruptcy.
- The business is not in bankruptcy.
A lender also takes other things into consideration when deciding whether or not to modify an existing business loan. If you are proactive in working with a lender on addressing payment problems before you ask for a modification, the lending institution is more likely to work with you.
If you have equity that partially protects the lender and you have been diligent in making on-time payments in the past, the lender is also more likely to modify your loan. It is also helpful to demonstrate a good credit history and a business plan outlining how you can improve revenue and meet your future obligations.
The Business Loan Modification Process
Whether you work through a legal representative or a commercial loan modification company, the steps to a commercial loan modification are similar:
1. Find a Reputable Representative
Talk to several experienced business attorneys who have negotiated business loan modifications and companies who regularly negotiate modifications. Check with your state and local bar associations and the Better Business Bureau to ensure the attorney or company you choose has a good reputation and track record.
2. Learn Everything You Can About the Loan
Review every page of your current loan agreement. The best way to ensure that a modification does not harm your business in the long run is by thoroughly understanding your current obligations. You should also know what options you have and what modification limits may be in place.
If your loan is a non-recourse loan and you default, the lender can foreclose on the property, but cannot pursue other remedies. This means the lender cannot seize other assets or sue for repayment. This works in your favor because the lender is more willing to negotiate a modification rather than risk losing some of the money owed.
If your loan does not include a non-recourse clause, you may still be able to negotiate a modification, particularly if foreclosing on your business will be costly to the lender. It can be expensive for a lender to hire someone to track down assets or sell a business or property to try and recoup the losses from a failed business loan.
This is where a loan modification specialist or attorney can be of great help. They can evaluate the loan, your business assets, cash flow and other factors to determine what you need to pay. This enables you to make an offer enticing to the lender while still being affordable for your business.
3. Determine What You Can Pay
Do not negotiate a commercial loan modification until you have a clear picture of what you can afford to pay each month toward the outstanding debt. Evaluate your current finances, including all bills, income and other business debts.
An attorney or loan modification company can help you get an accurate figure by reviewing company financials and accounts payable and receivable. It is important to know how much you can afford to negotiate a loan modification that keeps your business afloat without costing too much.
The lender may request certain documents to substantiate your financial situation, including:
- A personal financial statement.
- A business financial statement.
- An income and expense report.
- A current mortgage statement (if applicable).
- A statement of business assets.
Possible Commercial Loan Modification Options
The most difficult aspect of negotiating a loan modification is finding a middle ground acceptable to both the lender and the borrower. Any proposal you make must be attractive enough to the lender that it would rather accept new terms than try to recoup their losses through asset seizure or foreclosure. This is when working with an experienced modification specialist can be vital.
While you may want to lower the interest rate on your current loan, raising it slightly in exchange for a longer payment period may make the modification more palatable to the lender. This can work if you anticipate an increase in revenue over time or a future improvement in finances.
When you start negotiations, ask for a reduction in the amount you owe on the loan. This is not a first choice option, but some lenders would rather guarantee part of the loan amount rather than risk losing all of it because a business goes into bankruptcy or loses its assets.
Related Article: Can You Get a Business Loan if You Have Bad Credit?
By Mathew Sams –