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What is Considered a Loan Modification Hardship for Small Business Owners?

These troubling economic times have many business owners wondering if their businesses will be able to survive in the face of foreclosure.  One of the most popular tactics that businesses are using to avoid foreclosure of their business loans is loan modification.  Loan modification is an agreement between borrower and lender to modify the terms of an existing mortgage contract with the intent of lowering the monthly payments for the borrower.  Some loan modifications are temporary and others are permanent.  Different lenders offer different options, so the borrower will have to consult their lender to determine what kinds of plans are available.

Part of being approved for a business loan modification is being able to prove a financial hardship.  Loan modifications are often reserved for borrowers who are facing a financial hardship that makes payment of minimum monthly payments difficult.  By lowering monthly payments, the business loan can stay out of foreclosure, the borrower can protect their assets, and the lender can still make a profit.  Again, different lenders will have different policies, and these policies may define a “hardship” differently from lender to lender.

This kind of ambiguity in the lending industry leaves many individuals wondering exactly what a valid loan modification hardship for small business owners is.  Below are a few examples of the most commonly accepted forms of hardship for business owners:

–Unforeseen medical expenses.  These have a way of piling up on the individual since a medical problem can affect the person’s ability to operate their business.

–Natural disasters.  You can’t fight Mother Nature.  If a natural disaster disables some or all portions of a business, lenders are often sympathetic.

–Loss of key employees.  When the competition moves in and makes a better offer to employees, it will take some time to produce the usual amount of product.  This lack of production will lower profits.

–Crime.  Certain crimes can bring a business to its knees, like arson, theft, etc.  If a business has been the victim of a crime that is crippling its ability to perform, lenders are more likely to approve a modification while the business is rebuilt.

–Heavy debt.  Assuming the debt was created in an effort to build the business, lenders might modify a loan to help the struggling owner recover.  Debt created through recklessness, like gambling debt, will not be as easy to sell.

Keep in mind that the above list is nothing more than a few examples of what lenders might consider a loan modification hardship for small business owners.  There are many more examples that exist that may qualify for a modification, but to list each individual one would take far too long here.  Also keep in mind that not every lender will consider every example listed above to be a valid hardship.  An attorney can help the borrower negotiate with the lender and secure the best loan modification possible, especially if the lender appears unwilling to help the business owner.  Business owners should remember that they should always attempt a modification if they are in financial need.  Many will avoid asking for help out of pride, but this is the worst thing a business owner can do, especially when the entire business is at risk of being shut down.