I recently read an article by a consulting firm about how an SBA loan modification is not the way to go. Really? In no circumstances would it make sense for a borrower to pursue a loan modification?First of all, let’s get our terminology straight. The article was talking about 3 to 6 month temporary payment relief, which is technically a deferment, not a modification. A deferment simply means that payments are deferred, while a modification is a change to the loan terms that typically are in effect for the life of the loan. The most common examples would be rate adjustments or term extensions.
Both of these types of modifications can have material impact on the monthly payment for the life of the loan. So again I ask the question: why would this not be a good thing for a borrower? I have helped a number of customers with loan modifications, and because the bank granted a modification, they are in business today. I have a borrower who was granted a modification that lowered his payment from $3,500 to $1,800 per month.
My guess is that consultants who don’t have the experience with financial statement analysis and modifications prefer to steer their customers away from modifications simply because the consultant can’t help them with such a request, and therefore there is no financial incentive for the consultant to recommend such a request. A good workout consultant can talk to you about your situation, and recommend the strategy that works best for you, the client, and not simply steer you towards the strategy that earns the highest fee for the consultant.
The article I mentioned earlier goes on to say that the only way to is get a large reduction of debt via their “sophisticated strategy”, which usually entails deceiving your bank by selling your business to a friend, or deceiving your bank by starting a new corporation (owned by you are a related party), and selling the assets to that new corporation. In this example “sophisticated strategy” is also know as “fraud”. (Note: legitimate debt settlement is possible, but neither of those strategies qualifies as legitimate).
So at the end of the day, is a SBA loan modification for everyone? No, certainly not. That said, there are some business owners who would benefit tremendously from a loan modification, and it’s just plain wrong for someone to make a blanket statement that a modification is “not the way to go”.