When a borrower defaults, a negotiated workout is usually better for both sides than immediate enforcement. It is also where lenders inadvertently weaken their position.
Document the default first. A forbearance agreement should recite the existing defaults, the amounts due, and the borrower’s acknowledgement of both. Without that, the agreement can be argued to have waived or cured what preceded it.
Reaffirm the loan documents and the guaranties. A modification made without the guarantor’s consent can, depending on the terms and the jurisdiction, release the guarantor. This is one of the most common and most expensive oversights in the field.
Say what forbearance is not. It is a temporary agreement not to exercise remedies, not a waiver of them, not a cure, and not a course of dealing. State that expressly, and state that no further forbearance is implied.
Watch for lender liability exposure. A lender that goes beyond the credit relationship — directing the borrower’s operations, controlling disbursements to particular vendors, making commitments it does not honour — can find itself facing claims of control, breach of good faith, or interference. The line is between enforcing rights and running the business.
Take the opportunity to improve the position. Additional collateral, a confession of judgment where permitted, updated financial reporting, and reaffirmed waivers are all normally available in exchange for time.