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Our Guide to Taking Out a Small Business Loan Extension
October 15, 2021
What Is a Small Business Loan Extension

Our Guide to Taking Out a Small Business Loan Extension

If you’ve taken out a business loan but are struggling to make your payments, you can apply for a small business loan extension. With a loan extension, you may be able to avoid defaulting on the loan and damaging your credit score. However, there are some drawbacks you should consider before you pursue one.

Now more than ever, as small business owners recover from the COVID-19 pandemic, knowing your debt relief and loan extension options is critical.

In this blog post, we’ll explain everything you need to know about how business loan extensions work.

How a Business Loan Extension Works

Business loan extensions vary from lender to lender, and depend on the loan type, term, and other financial factors. Extensions will allow you to skip a certain number of loan payments and add them on to the end of your loan term.

If you decide to ask for a loan extension, the maturity date of your business loan will be extended by the number of payments you postpone. Therefore, it’ll extend the deadline, or the loan term, because you will take a break from paying off the loan.

Requesting a business loan extension may make sense if you’re short on cash flow and don’t have the funds to cover your payments. By taking out an extension, you can postpone payments while also reducing the risk of default.

In many cases, business owners have been granted loan extensions since the onset of the COVID-19 pandemic. For instance, the federal government provided loan extensions to some borrowers.

How to Qualify for a Business Loan Extension

Most business lenders will ask that you not only show financial hardship but prove that your situation is temporary.

For example, if the COVID-19 pandemic had a negative impact on your business, a lender may approve your request for a COVID small business loan extension.

They’ll hope that once conditions improve, your business finances will as well, and you’ll be able to make your loan payments again.

Also, business loan lenders will likely take a close look at your payment history. If you have a track record of on-time payments, they’ll be more inclined to give you a loan extension than if you’ve missed many payments in the past.

Keep in mind that some lenders will charge fees for extensions, which may be flat rates or a percentage of your outstanding balance.

The Pros and Cons of a Small Business Loan Extension

Before you move forward with a business loan extension, be sure to consider these notable advantages and disadvantages.

The Pros of Loan Extensions

  • Prevent Default: The greatest perk of a business loan extension is that it can help you avoid default. By taking out an extension, you won’t have to worry about your credit score taking a major hit.
  • Free Up Cash Flow: A loan extension can free up cash flow so you can pay for other essential expenses like your rent, inventory, payroll, or other expenses to continue to run your business. It can be a real lifesaver for your business, especially if you’re dealing with a cash shortage.
  • Enjoy Short-Term Financial Relief: When the going gets tough, a business loan extension can give you the temporary relief you need. It may help you get through your financial roadblock.

The Cons of Loan Extensions

  • Interest Will Accrue: Even though you won’t have to make payments for a certain period, your loan will still accrue interest. You may end up spending hundreds or even thousands of extra dollars over the life of your loan.
  • No Guarantee: Just because you apply for a small business loan extension doesn’t mean the lender will grant it. Some lenders are selective and only offer extensions to businesses that can demonstrate serious financial hardship.
  • Potential Fees: Loan extensions aren’t necessarily free. Your lender may charge you a fee that can make this benefit a bit expensive.New call-to-action

How to Avoid Loan Default

If you’re worried about defaulting on your small business loan program and don’t get approved for a business loan extension, follow these steps:

  • Speak to Your Lender: If a small business loan extension isn’t an option, ask your lender about alternative solutions. They may let you defer some payments or arrange a payment plan that fits better with your new financial situation.
  •  Make a Partial Payment: Even if you can’t make your entire payment, making smaller payments can help you avoid a default. If the lender notices you’re making a good faith effort, they may be more likely to work with you and come up with a solution.
  • Consult a Debt Counselor: A debt counselor may be worthwhile if you’re overwhelmed with debt and want to design a plan to get out of it. They can design a debt management plan and provide you with tips to pay down your debt.
  • Speak to a Bankruptcy Attorney: While bankruptcy should be a last resort, it may make sense to consult an attorney to determine if it’s a good option. Also, note that bankruptcy will have a more severe impact on your credit score than defaulting, which should be avoided at all costs.

Conclusion: Get Through a Difficult Time with a Business Loan Extension 

In a perfect world, you’d always be able to make your loan payments in full and on time. The reality, however, is that unexpected financial challenges may arise when you least expect it. If they do, a business loan extension can help you get through them and avoid default. Don’t be afraid to reach out to your lender, explain your situation, and find out if an extension is an option.

Fora Financial

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.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].