A Loan Modification For Your Commercial Loan? Forget It

The banks are beginning to figure out that they really must cooperate with defaulting (or near defaulting) borrowers. What choice do they really have? The alternative-foreclosure and liquidation by auction-is fraught with issues for the bank, all resulting in little or no net gain and large expenses. Yet, they continue to tote out the modification offer to challenged commercial borrowers as if they were offering them gold or the answer to all their problems. They act as if they were being kind and considerate, understanding and helpful.Silly them and silly borrowers who buy this rap. Silliest of all? Those defaulting borrowers who actually follow through with this and enter into a modification agreement as if it cures anything at all. It is like putting a bandage on a broken bone, or taking two aspirin to cure your cancer. The medicine administered will not cure the malady.Here are the obvious issues:1. While it is true that the modification can improve your cash flow position, reducing your monthly outflow for debt service, it ignores the basic realities of the situation. It ignores the large fee the banks frequently require to implement such a plan, sometimes very unaffordable and somewhat outrageous, although this varies from bank to bank and borrower to borrower.2. It further ignores the reality that the business can no longer afford such debt no matter how modified it may be. A significant percentage must be forgiven, not extended. In this scenario, the loan may be extended for many years beyond the original agreement and despite a reduction of debt service payments the total amount paid ends up being even more than originally agreed to because of the increased years of debt service. What is really accomplished here? Death by a thousand cuts, instead of a bullet in the heart.You must avoid loan modifications at all costs as they resolve nothing in exchange for a reduction of monthly debt service. This does not solve the problem, it only extends it further. It does not eliminate debt, which is the only solution, it expands debt further and deeper.Whether or not it is an SBA guaranteed loan or a traditional secured bank loan, the answer is debt forgiveness, not debt modification. Loan modification is another trick the banks have to play on you to extract more money than your business can possibly afford. Be smarter than the banks. Say, “Thanks, but no thanks.”

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