Business Loan Deferment: Why It Can Protect Your Finances
Business loan deferment is short-term financial relief that enables eligible borrowers to “pause” their payments. Usually, deferment lasts between one and three months.
Due to the pandemic’s impact on small businesses, many lenders have expanded their business loan deferment programs. Even if your financial challenges aren’t pandemic-related, though, loan deferment can help you get past them.
To help you understand how business loan deferment might help, this post will review:
- What business loan deferment is
- How to defer a small business loan
- In what cases deferment is recommended
- The potential results of business loan deferment
Business Loan Deferment Definition vs. Forbearance
You may have heard of loan deferment or forbearance in the context of student loans. However, in the business loan world, the terms “loan deferment” and “loan forbearance” are often used interchangeably. That said, even with business loans there is an important distinction between deferment and forbearance.
When your loan is deferred, your loan term is extended for the same number of months your payments are paused. For instance, if you had a one-year loan that you put into deferment for three months, your new loan term would be 15 months.
In this case, your payments could remain the same. However, your loan may continue to accrue interest or fees while it’s deferred, which would increase your payments.
When your loan is placed in forbearance, your loan term is not extended. This means that even after you’ve paused payments, you’re still expected to repay the loan over the same period. To compensate for the period that your payments are paused, your later payments will increase significantly.
If you’re considering forbearance or deferment, ask your lender if the loan term will be extended. That way, you can avoid any confusion in predicting your future payments.
How to Defer a Small Business Loan
Except for certain SBA loan deferment programs, lenders handle business loan deferment on a case-by-case basis. Generally, you’ll need to contact your bank or alternative lender directly to see what your deferment options are.
It’s also a good idea to check your lender’s website to see if they have any information about business loan deferment.
If you have an SBA disaster loan that is eligible for deferral, you’ll receive an automatic deferment of 12 to 24 months. The length of your deferment period depends on when you obtained your loan.
- All SBA disaster loans made in calendar year 2020, including COVID-19 EIDL, will have a first payment due date extended from 12-months to 24-months from the date of the note.
- All SBA disaster loans made in calendar year 2021, including COVID-19 EIDL, will have a first payment due date extended from 12-months to 18-months from the date of the note.
SBA loan deferments are also available for non-disaster loans, per Bill Manger, Associate Administrator of the SBA’s Office of Capital Access:
“Deferments are available to SBA borrowers under normal circumstances when they are suffering a temporary cash-flow problem. Deferments are appropriate if the temporary payment relief can enable the borrower to improve its cash flow so that it can resume payments on its SBA loan.”
When to Defer a Small Business Loan
Business loan deferment isn’t without its downsides, depending on your lender’s policies and fee schedules:
- Your loan payments after deferment may increase.
- Deferred loans may be reported as delinquent, which can hurt your credit score.
- There may be additional fees related to deferring your loan.
Also, you must consider whether business loan deferment will actually help you. If you anticipate being unable to afford your payments even after a few months, deferral could make things worse. If your financial challenges extend beyond one to three months, negotiating a longer loan term may be the better option.
With all this in mind, it makes the most sense to defer a small business loan when you meet these criteria:
- You can afford (or avoid) increased loan payments, credit score impacts, and additional fees.
- Your financial situation will improve after the deferment period (one to three months).
Conclusion: It Never Hurts to Ask About Loan Deferment
Since business loan deferment is handled on a case-by-case basis, you can’t know if it’s right for you until you talk to your lender.
With certain lenders, under certain circumstances, deferring your loan might not hurt your credit score or increase the cost of your loan. If that’s the case, there’s little downside to pursuing business loan deferment.
Remember, even if you decide against deferment, you won’t be penalized for inquiring about your options. Therefore, you might as well explore your options prior to deciding. Once you do that, you’ll have a clearer idea of whether business loan deferment is right for your business.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.