Even successful businesses sometimes encounter cash flow problems. Perhaps the business overextended itself in an expansion and has not yet begun to recoup the investment, or the loss of a key client creates a shortfall. In some cases, the problem is caused by factors outside the company’s control, such as a natural disaster.
In those cases, it may be in the best interests of both the business and the lender to come to an agreement that alleviates the pressure from the business and allows it to rebuild. A forbearance agreement is one possible solution.
A forbearance agreement is so called because one party agrees to forbear legal remedies available to it during a certain period of time, so long as certain conditions are met. Whether a lender will be willing to enter into such an agreement and under what term will depend on a number of factors.
Who is Eligible for a Forbearance Agreement?
The lender’s goal in offering a forbearance agreement is to improve the chances of eventually receiving full payment, or at least a more significant amount than it could expect if it were to enforce the terms of the original loan documents. Generally if the business can establish that the cash flow problem is short-term and there is a substantial likelihood that timely payments will resume within an acceptable time frame, or the loan be refinanced and paid in full, the lender will be more inclined to consider a forbearance.
On the other hand, if it appears to the lender that the company’s financial situation will only worsen and the best chance to minimize losses comes from pursuing its legal remedies immediately, a forbearance agreement is unlikely. Thus, one aspect of the request and negotiation regarding a commercial loan forbearance agreement will involve putting together a plan to demonstrate to the lender that the problem is short-term and that the company has a plan for stabilizing its finances and making good on the loan. Driving the debtor company into bankruptcy or dissolution is bad for the lender, but so is gambling on a business that is likely to deteriorate further rather than recover.
Negotiating a Commercial Loan Forbearance Agreement
When you request forbearance in connection with a commercial loan agreement, you are not asking a “yes” or “no” question. Rather, the lender’s willingness to consider forbearance opens a discussion of terms that will provide the lender with adequate protection while allowing the business room to recover.
Concessions to the Borrower in a Forbearance Agreement
The goal of the forbearance agreement is to allow the borrower to stabilize business operations and regain its ability to pay debts as promised. In order to achieve that, the lender will typically agree to forbear its right to accelerate the debt and to pursue other legal remedies for a specific period of time.
Depending on the specifics of the situation, the lender may require partial payment of the delinquent amount or may waive or reduce payments for a specified time period. In exchange for these concessions, the lender will typically require certain actions and commitments from the borrower, which vary depending on several factors.
Concessions to the Lender in a Forbearance Agreement
The lender’s primary purpose in offering a forbearance is not to help out the borrower. It is to maximize the lender’s recovery of the debt. Thus, when a lender offers a forbearance, it is typical to include provisions designed to assist the lender in ultimately collecting on the debt. Of course, these vary depending upon the terms of the original loan, the extent of the default, the nature of the business, the duration of the problem, and the reason for the default. However, some common provisions include:
- A requirement that the debtor company affirm the amount of outstanding debt and the default
- A waiver of defenses to repayment of the loan
- Requirements that the debtor take certain actions to improve cash flow, such as:
- Working with an outside consultant to increase profitability
- Seeking refinancing of the loan
- Listing certain property for sale, whether real estate or excess inventory
- Additional security on the loan
- A representation from the debtor that it does not intend to file for bankruptcy protection
Talk to a Business Lawyer about Commercial Loan Forbearance
When a company faces a short-term cash flow problem or a crisis arises, the ability to negotiate with creditors may mean the difference between a rough period and closing the doors for good. Our experienced business lawyers can help you build the strongest case possible for forbearance and then negotiate on your behalf to increase your likelihood of success.