Using Arbitration or Mediation to Resolve Small Business Lending Dispute

Using Arbitration or Mediation to Resolve Small Business Lending DisputesWhen a small business runs into issues with a lender, it can be incredibly stressful trying to resolve the dispute. Legal action seems daunting, but there are alternatives like arbitration and mediation that can provide a faster, less expensive way to reach an agreement. This article will break down the key things small business owners need to know about using these alternative dispute resolution methods to handle lending conflicts.

What is Arbitration?

Arbitration is a private process where disputing parties present their case to an impartial third-party arbitrator or panel of arbitrators. After reviewing evidence and hearing arguments, the arbitrator(s) makes the final decision to resolve the dispute. This decision is legally binding, meaning both sides have to adhere to the terms of the arbitrator’s ruling.There are several key benefits arbitration offers over heading to court:

  • It’s usually faster. A court case can drag on for months or years, while arbitration typically concludes in just a few months.
  • It’s less expensive. Attorney fees, expert witnesses, and other litigation costs quickly add up. Arbitration fees are typically lower.
  • It’s private. Unlike court cases which are public record, arbitration proceedings and rulings are kept confidential.
  • Arbitrators are experts. Parties can select arbitrators who are experts in the field related to the dispute rather than relying on a judge who may lack specialized knowledge.

The downside is limited appeals. Courts give the opportunity to appeal rulings on legal grounds, but judicial review of arbitration decisions is very limited.

When Arbitration Can Help Resolve Lending Disputes

Arbitration clauses are commonly found in loan agreements and credit contracts. Even without a contractual arbitration provision, lenders and borrowers can mutually agree to arbitrate a dispute after it arises.Whether the conflict involves a denied loan application, allegations of lending discrimination, disagreements over defaulted loan terms, or other issues, arbitration can provide an alternative resolution method. The key is having disputes that involve negotiable issues lending themselves to compromise.Common small business lending disputes where arbitration can be effective include:

  • Interest rate or fee discrepancies
  • Disagreements over collateral or security rights
  • Denied access to promised loan funds
  • Contesting a loan default or acceleration
  • Errors in credit reporting

Evaluating different viewpoints and evidence, arbitrators craft compromise rulings. This is more expedient and flexible than strictly enforcing legal positions through litigation.

What is Mediation?

Mediation is facilitated negotiation. Rather than an arbitrator deciding the outcome, disputing parties work through issues with the aid of a trained, neutral third-party mediator. This mediator helps to foster open communication, identify interests, and explore options for a mutual agreement.Compared to arbitration, mediation is usually:

  • More informal. There are no extensive pleadings or rules of evidence.
  • Completely voluntary. Parties have control over outcome and can withdraw anytime.
  • More collaborative. Mediators don’t impose an outcome, but instead facilitate negotiations.
  • Confidential. Like arbitration, mediation proceedings and settlements are not public.
  • Less binding. Settlements require mutual agreement and may not be strictly enforceable.

A lot of the same small business lending disputes appropriate for arbitration can also be effectively resolved through mediation. The flexible, interest-based approach allows creative, win-win solutions tailored to parties’ needs.For instance, in a dispute over an allegedly wrongful default, mediation could result in reinstatement of the loan on modified terms rather than the lender strictly enforcing default remedies. Or to settle a conflict over errors in credit reporting, the parties might mutually agree on correcting information without assigning blame.The key is that mediation empowers the parties themselves to craft the resolution through consensus. An outside decision isn’t imposed like in arbitration or litigation.

How Arbitration and Mediation Compare to Small Claims Court

For smaller lending disputes under $10,000 or so, using small claims court is another alternative to arbitration or mediation worth considering. The benefits of small claims include:

  • Low filing fees. Courts costs are minimal compared to attorney fees.
  • Relaxed procedural rules. Formal pleadings, discovery, and evidence rules don’t apply.
  • Speedy resolutions. Trials typically happen within a couple months of filing.

However, small claims courts have downsides like still requiring personal appearances for hearings, limited discovery rights, higher appeals thresholds, and no guarantee a ruling will be made based on principles of equity. There are also public record and collection issues if a judgment is awarded.For many lending disputes, arbitration or mediation allow parties to reach equitable compromises faster, in a more flexible setting, and with privacy protections. The key is assessing each available dispute resolution option given the unique circumstances.

Selecting Arbitrators or Mediators

Resolving lending disputes hinges on having skilled arbitrators or mediators guiding the process. Those with banking, lending, or financial expertise plus knowledge of applicable laws are best equipped to handle small business loan conflicts.Arbitrator credentials like being a retired judge, accountant, banker, or business attorney is a good indicator of qualifications. Top mediators often have backgrounds as attorneys, financial professionals, or credit counselors. Their training and experience in interest-based negotiation is key.It’s also important arbitrators and mediators carry professional certifications and memberships with respected alternative dispute resolution (ADR) organizations. Leading groups like the American Arbitration Association (AAA), CPR Institute, and National Academy of Distinguished Neutrals (NADN) help identify reputable neutrals.AAA offers a Small Business Arbitration Program with simplified procedures and rules. They have arbitrators nationwide with small business law expertise. Likewise, CPR’s financial services mediators and arbitrators handle banking and lending disputes.When researching arbitrators or mediators, look for:

  • Strong communication and listening skills
  • Impartiality and objectivity
  • Ability to analyze complex financial issues
  • Small business lending experience
  • Knowledge of relevant state and federal laws and regulations
  • ADR training through respected professional organizations

Parties should interview potential arbitrators or mediators to confirm qualifications and discuss case specifics. Many ADR professionals offer free initial case consultations as well.

Key Takeaways

Dealing with small business lending disputes can be overwhelming. Owners are often anxious to find expedient and affordable solutions allowing them to move forward. Through arbitration or mediation, fair compromises mutually acceptable to all sides are achievable without getting bogged down in lengthy court battles.

  • Arbitration provides binding resolution through a decision by an impartial third party expert
  • Mediation facilitates interest-based negotiation allowing parties to retain control over the outcome
  • Both options offer speed, reduced costs, flexibility, and privacy advantages over litigation
  • Selecting qualified arbitrators or mediators with small business lending expertise is critical

Rather than automatically filing a lawsuit over lending disputes, small business owners would be wise to explore arbitration or mediation alternatives. An equitable agreement could be just one productive session away!

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