Are you a small business owner who is facing payments that are increasingly less affordable or large balloon payments on your mortgage loans?
If yes, then you may think of filing bankruptcy, closing the doors or let it go. There are other options too among which one of them is highly supported by the US government. This is known as commercial mortgage modification which means reorganizing your present loan in order to make the loan payments affordable for you. However, you will be able to find out your best option depending on various factors such as the reason of your problem, your long term goals, the place where mortgage loans modification will work and the advantages and disadvantages of taking out a commercial mortgage modification.
The reason behind your cash flow problem
You need to know that commercial mortgage loan defaults generally fall into either of these categories:
- Debt service default
- Balloon payment default
The debt service default can be explained easily. According to this, after you make 3 years of payments on your commercial mortgage, you will not have to make the lump sum principal payment as per the loan agreement and cannot refinance for one reason or another. A debt service default may arise due to the problem of insufficient flow of cash.
How a commercial mortgage modification works
This is very important for your decision. Postponing the unavoidable does not help you or your lender from foreclosure. Some of the factors that should be considered are stated below.
- Plan for your business – Are you getting new contracts for your business? Have your business established successfully? Will something happen in the industry that will help your business grow? Make the future plans for your business from before hand so that you may be able to set up your business in the most successful manner.
- The DSCR after modification – The debt service coverage ratio is the calculation of whether or not the money that you are investing in your business is enough to cover the outflow. The question that the bank is usually interested in asking is if you want to modify the loan and if the coverage ratio is low to service your debt without making any default
- Know your exit plan – In order to understand whether or not the exit plan will work out, you need to identify an exit policy or a plan as to what will happen at the end of the loan. In case the term period of the loan is set for only few more years, the question may arise as to how you will make the next balloon payment. Make sure that you do not ignore your exit plan when you think of commercial mortgage modification.
Understand your long term goals
Being a business owner, if you are thinking of commercial mortgage modification, an evaluation of the company's future, and the mortgage holder's objectives can help you in deciding as to whether or not a modification is the right answer to solve your problems. If your long terms goals does not match with mortgage loan modification, then even if you take out a commercial mortgage modification, it is probably going to fail sometime.
The advantages and disadvantages of bankruptcy
The United States commercial bankruptcy including Chapter 11 have been aimed particularly in order to help people who find it very much difficult to pay off their business debt. You have to pay a fee of $1000.00 for filing Chapter 11 bankruptcy. A debt management plan should accompany your filing. However, your debts are not completely discharged with Chapter 11. Rather, the business assets are used to pay off the creditors for a period of 3 years when possible. In addition, the fees of the attorney are high too.
Commercial bankruptcy needs to be avoided if you have some flow of cash in your business and you can restructure your debts so as to improve your debt service coverage ratio. As such, the reason of the problem, your long term goals, if modification will work, and the pros and cons of bankruptcy should be your major considerations.