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A commercial loan modification is also known as a workout loan, and is usually requested by a business borrower who is unable to refinance the loan. If the commercial loan is delinquent due to a revenue shortfall or other operational problems the business is having, a modification may be the only thing the lender can do to prevent the loan from going into default. By restructuring the loan to an affordable repayment plan, the savings may then help the borrower return their business to profitability.
Commercial Loan Modification Process
If you are a business owner requesting a commercial loan modification, you should contact the lender before your payments are in arrears. By being proactive, you will have a better chance of receiving a workable modification solution.
The only problem with contacting your lender before you have payment issues, is the lender may not see the need to modify your loan since it is being paid on time. However, it is still better to not wait for any of the problems to cause a potentially fatal blow to your business.
In order to show your lender why you need a commercial loan modification, you should prepare some documents for them to review. These can include the following:
- Current business plan
- Financial statements
- Tax returns
- Letter of hardship explaining your reasons for requesting a modification
Having all of your documents prepared will make it easier for the lender to see why you need to restructure your payment through a modification.
Meet with Your Lender
You may want to consult with a commercial loan modification company for help in negotiating your loan. There are fees you will have to pay the company, so be sure to find out the amount before you agree to use them for assistance.
If you are comfortable negotiating on your own, finish preparing your modification materials and contact your lender. Inform them of the reason you are calling, so they can be prepared to give you some advice on the best way to proceed. If they offer you the opportunity to refinance your loan instead of modifying it, consider this option before you go through with the modification.
While refinancing involves closing costs, you may be able to have the lender include these costs in your new loan. However, if there are loan-to-value issues with your commercial property, the lender will probably not be able to offer you a refinance at all.
If the lender is willing to modify your loan, they may need to extend the loan term to lower your payments to the point of affordability. You will have to decide if you agree with their assessment on the payment amount.
Find out the cost of the modification, and if you do not want to disrupt your business cash flow, ask the lender if they will include the costs in the new loan amount. If they will not comply, you will have to change your operation as needed for the short term to cover the closing costs and fees.
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