Business loans, including commercial real estate loans, often make it possible for a company to begin operations or expand its business. Unfortunately a business’s cash flow may fluctuate, and then those same loans that enabled the business can cripple, even threaten the future of the operation.
The lender wants to get paid. The company leadership wants to keep operating and increase profitability. In some cases, it is in the best interests of both parties to negotiate a loan modification. A change in repayment terms, whether that means a reduced interest rate, stretching out payments over a longer period of time, or other adjustment, may give the business the breathing room it needs while increasing the lender’s chances of ultimately being repaid.
Existing loan terms may be complex and negotiating a loan modification that is workable for the business may be complicated as well. Working with an attorney experienced in negotiating commercial loan modifications can smooth the process and improve the outcome.
Commercial Loan Modifications v. Commercial Loan Workouts
Often people use the phrases “loan modification” and “loan workout” interchangeably. However, there is a difference. While a loan modification involves rewriting the terms of a loan, a workout may include multiple components. In some cases, a loan modification may be included in a workout. However, the workout may also include other strategic solutions, such as a period of forbearance.
Understanding the Terms of Your Commercial Loan
Before seeking to modify the terms of your loan agreement, it is important that you understand what those terms are and how they impact your current situation and your options. Unfortunately not every business owner or executive takes the time or makes the investment to fully understand those terms when entering into a loan agreement. That can lead to unpleasant surprises, but may also mean that you have options of which you are not aware.
Before you approach your lender to discuss a loan modification, carefully read your existing loan documents and consider consulting a business financing attorney who can review the documents with you and explain exactly where you stand.
Qualifying for a Loan Modification
Whether or not a lender will approve a loan modification request depends on a variety of factors. In short, the lender’s motivation for offering a modification will be to maximize the likelihood of payment of the debt. Thus, your likelihood of receiving a workable loan modification will largely depend upon your ability to demonstrate a strong likelihood that the modification will allow you the relief necessary to increase your revenues and resume or continue making payments. Some of the factors that will influence this analysis include:
- How proactive you are in addressing problems–a lender will typically be more likely to work with you if you make contact and seek out solutions as soon as you know that
- you will be unable to meet the existing payment terms
- The extent to which equity in the property secures the lender’s interest
- Your payment history on the loan and your general credit history
- Your business plan and realistic, supportable projections for future revenues
Talk to an Experienced Loan Modification Attorney
Doing the groundwork enhances the possibility that your lender will agree to a loan modification and may improve the terms available to you. One of our experienced commercial finance attorneys can assist you with every step of the process, including:
- Understanding your current loan documents and the options available to you
- Assessing what terms will realistically allow you to make payment on the loan while maintaining your operations
- Putting together documentation to help assure the lender of your future ability to pay
- Putting together a proposal for the lender
- Negotiating on your behalf
- Reviewing modification documents and ensuring that you fully understand your rights and obligations
The best time to talk to an attorney about your options is as soon as you know that you are going to have difficulty meeting your loan obligations, even if you have not yet missed a payment. Not only will this allow you to approach the lender before your account is seriously delinquent, but it will give you and your attorney time to assess the best option for you under your specific circumstances. If a loan modification, either alone or in combination with other solutions as part of a loan workout, appears to be the right answer for you, that additional lead time will allow you to create the strongest possible package of projections and documentation.