As homeowners suffer from financial hardships and this could result in losing their homes, also the business owners experience tough times that could negatively affect their business. When it comes to preventing the possibility of declaring bankruptcy or defaulting a loan, businesses do have one feasible solution available for them, and this is known as ‘workout loan’. However, it is essential to identify whether you really need to pursue this process. It is best to seek for loan modification after you thoroughly exhausted all the other possibilities.
If your lender ends up agreeing to meet with you for making a discussion about a commercial ‘workout loan’, then you have to find the necessary documentation according to the lender needs. This type of paperwork will help back up your claim that you are currently experiencing financial hardships and are not able to make your monthly loan payments on time. Ensure to have any alternative efforts you have tried ineffectively before you contact to your lender.
Receiving a workout loan can ease the financial stress that you might have been dealing with. Depending on the outcome, you can arrange for an interest only payment or end up paying less per month. Alternative probability is prolonging the period of repayment. All of these in a loan workout allow you to get your cash flow together and keep your business running.
Factors Considered For Qualifying For a Workout Loan
Qualifying for a workout loan will entirely depend on whether or not foreclosing on a commercial property will cost more than a commercial workout loan from lender’s point of view. Following are the factors that a lender will consider for this are:
- The amount of equity within the commercial real estate
- The installment history of the borrower and continuously late or financial hardships add to misconduct
- The current financial status of the borrower
- The income producing property has the capacity to deal with the recently restructured loan terms
- Regional or nearby economic situations
Business owners looking for Workout Loan will need to provide a business plan to the lender. This plan justify to the lender why a workout for modifying existing mortgage loan or influence installment arrangements will fly.
Steps to a Successful Loan Workout
You need to follow the below steps for successful approval for workout loan:
- Required Paperwork
The required paperwork is collected from the property owners. The documents required for this purpose are, rental agreements, copies of the expenses incurred in the previous year, copies of mortgage note, etc.
- Research Analysis
Before submitting a workout loan to the lender, a financial snapshot of your situation is required. The lender is concerned with your ability to pay every month if your loan was restructured to more favorable terms. Ascertaining the current market value, rental rates and existing comparable sales are some of the important factors to be considered. After reviewing that all the documents are correct and complete, a workout package is created.
- Lend Submittal
Once a confirmation of delivery is received from the lender, the submission package is forwarded to a workout professional. Non confirming receipt of the workout package by the lender describes that having your file stuck somewhere in the mail room for weeks.
- Negotiation Process
The workout specialist analyses the package and presents a loan modification offer. Sometimes the owner of the property or third party workout firm will make counter offer until an agreement is expected with favorable terms of loan. The whole process from starting to the end almost takes 2 to 3 years to complete. Keep in regular contact with the workout professional at the lender until a proposal is received.
- Final Approval
Once the lender approves the newly restructured mortgage loan, application is presented to the property owner for analysis. The property owner can anticipate the following options:
- Lower interest rate
- Greater cash flow or reduction of principal
- Deferment of payments
- Extended maturity date
The lender can propose any combination of these options. Finally, the modified loan documents are signed by both the parties to make the necessary changes official.