It’s not uncommon for businesses to face financial woes, whether due to changed markets, supply chain disruptions, or staffing shortages. When this happens it might become difficult for you to make good on your obligations, which could put you at risk of having your commercial loan foreclosed upon.
While that can be enormously stressful, you don’t have to sit back and allow yourself to be defaulted on. Instead, you can be proactive in taking the steps necessary to protect your financial positioning and your business’s long-term viability. If your business is facing a financial problem, then you might want to consider whether a loan workout with your creditor is possible.
What is a loan workout?
A loan workout is essentially an agreement that you come to with your lender to avoid default. This may mean decreasing the interest rate on the loan, expanding the maturity date, or finding some other way to reduce the monthly payment that you owe on the loan. This can free up enough money to prevent you from defaulting on your loan, which in turn can give you and your business greater financial stability and longevity.
Will your creditor be receptive to a workout agreement?
It depends on the circumstances. However, many lenders begrudgingly agree to these workout agreements because a default can be risky and costly to them. By defaulting, the lender may be unable to fully collect the debt, and they may discover that you don’t even have enough assets to cover their losses if they choose to foreclose.
That said, your lender probably isn’t going to reach out to you to discuss a workout agreement. Instead, you’re going to have to be proactive in communicating with them to discuss your financial challenges and your ideas for how to make good on the loan.
How to convince your lender that a workout agreement is appropriate
If you want to persuade your creditor to work with you on a workout agreement, then you need to understand what the creditor is looking at in these situations. Therefore, you might want to do the following:
- Focus on your cash flow to demonstrate to the creditor that you still have money coming in.
- Be honest with your creditor and emphasize the strengths of your business.
- Be prepared to have your assets analyzed and evaluated by your lender.
- Try to minimize the perception that you’re in an immediate crisis.
- Demonstrate the potential that your business has.
- Show how you may be able to increase the value of your collateral.
- Illustrate to your creditor that you have various methods of repaying your loan.
Remember, you want to convince your lender that they’re better off by allowing you to modify the terms of your loan rather than holding you in default and foreclosing on you. Therefore, you’ll be better off if you can demonstrate that you have a plan to get your business operations back on track and repay your debt.
Do you need a legal advocate on your side?
A loan modification or workout agreement can provide you with the financial lifeline that you need at a time when your business is struggling. That’s why you need to make sure that you take advantage of the opportunity that’s before you.
This can be a complicated matter, though, which is why you might want to consider having a legal professional on your side. With legal guidance, you might be able to obtain the protection and relief that you need to refocus on building your business and finding success.