What's a Forbearance Agreement, a Business Banking Consultant's View
Posted by Bill McDermott on Thu, Jun 03, 2010 @ 12:08 PM
Recently, a business owner was looking for a business banking consultant to help him negotiate a forbearance agreement with his bank. I was introduced to him by another client and went to work.
by Dystopos
"A forbearance agreement is typically an agreement to postpone, reduce, or suspend payment due on a loan for a limited and specific time period. Interest that accrues during the forbearance remains the debtor's responsibility. When the forbearance expires the unpaid interest is added (capitalized) to the principal balance of the loan. A forbearance request must be approved by the lender.
Typically, the lender agrees not to foreclose on the property or accelerate payments due on the loan during the forbearance period. In exchange, the debtor agrees not to contest any actions taken by the creditor to collect the debt in the event that the debtor fails to make scheduled payments or live up to other terms of the forbearance agreement." definitions.uslegal.com
In this case, my client did not meet his 30 day payout on his line of credit and did not meet his cash flow covenant on his mortgage loan and term loan. Because his line of credit, mortgage loan and term loan had cross-default provisions, all three loans were in technical default (even though payments had been made on time). In exchange for the bank postponing the default, my client was asked to pay a forbearance fee (.5% of all loan balances), pay for all the legal fees (his and the bank's), pay for an updated appraisal on the real estate. In addition, the rate increased on all loans 1%. This was almost $30,000 even before the increase in the interest rate.
In addition, there can be legal terms where a bank can ask you to waive certain legal rights, avoid seeking bankruptcy protection and affirm that other defaults may exist outside the agreement. It is recommended that you have your legal counsel review any document before signing.
Forbearance agreements are becoming more common due to changes in the economy and the current banking environment. However, if at all possible, try to work out other options with your bank/banker before a forbearance agreement becomes necessary. Those options could include an agreement to increase the rate or fees, additional collateral or contributing additional equity to the company. With those options, the bank could possibly waive covenant violations versus enter in to a forbearance agreement.