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.
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.
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.