Forbearance is a legal concept that is often misunderstood by business professionals. In its simplest form, forbearance is the act of exercising restraint from taking action and is usually used to postpone or delay the enforcement of an obligation or right. Forbearance often comes into play in contractual relationships, such as those between a lender and borrower.
For instance, when a borrower fails to make a payment on a loan, a lender might exercise forbearance, in that they chooser not to take immediate action or demand payment. Instead, they might enter into an agreement with the borrower, allowing them more time to make the payment. This agreement is known as a forbearance agreement, and commonly includes details about what actions the lender is foregoing and what is expected of the borrower to make up for the missed payment.
Forbearance can be beneficial for both parties in a contractual relationship when it is used properly. It allows the borrower more time to address their financial obligations, while the lender can avoid having to resort to collection action. For businesses, forbearance should be used in a thoughtful and strategic manner – when exercising forbearance, all parties should be aware of the terms and conditions of the agreement and any potential risks.
The Benefits and Risks of Forbearance for Businesses
For businesses, the most significant benefit of forbearance is that it provides an opportunity to remain in compliance without risking damage to the relationship. In the event that a borrower is temporarily unable to pay back a loan, forbearance can be a useful tool for resolving the situation. }
While forbearance can be advantageous, it can also present risks for lenders. Forbearance agreements are legally binding, and if a borrower defaults on the agreement, the lender may still be liable. Therefore, it’s important to ensure that the terms of the agreement are fair and reasonable to both parties and that the borrower is in a financial position to meet their obligations.
Making the Most of Forbearance in Your Business
To make the most of forbearance agreements, businesses should make sure to understand their rights and responsibilities under the agreement. While it may be tempting to offer leniency to borrowers, it’s important to remember that forbearance is not a blank check – any modifications to a contract should be done in the best interests of both parties.
Due to the risks that come with exercising forbearance, it’s important to seek legal counsel when entering into a forbearance agreement. Legal expertise can help ensure that the terms of the agreement are fair and that the risks are minimized. Additionally, it’s beneficial to review a forbearance agreement on a regular basis to make sure it is still in both parties’ best interests.
When used thoughtfully, forbearance can be a powerful tool that helps businesses stay in compliance and preserve relationships.