Key takeaways
- Deferring your small business loan payments can give you some breathing space to build some cash reserves during a difficult time. It usually lasts one to three months.
- Interest can still accumulate during this time, so you may repay more in total; it’s not an interest holiday.
- Talk to the lender who holds your business loan about your options and see what they offer.
Because of the coronavirus pandemic, many small businesses do not have the cash to meet all their obligations. Deferment is when lenders allow borrowers to pause their loan payments for a set period of time. Loan deferment can give you more time to pay, protect your credit from late payments and free up a little cash for day to day expenses.
Can you defer your business loan payments? And should you? This article will answer these two questions.
Deferment or forbearance?
Many consumers mix up deferment and forbearance. For government student loans, the terms come with differences in treatment, such as interest. In small business loans, the terms get used almost interchangeably.
The Nolo Plain English Law Dictionary defines forbearance as voluntarily refraining from action. A creditor may forbear from enforcing a debt by temporarily postponing or reducing payment amounts.
Deferment by comparison skips payments for a defined period. The lender expects to be made whole and the skipped payments become due later.
In practice, forbearance and deferment can amount to the same thing. VyStar Credit Union, based in Florida, makes it easy to understand, with an online listing of its policy on deferments for its commercial loans.
VyStar lets its borrowers defer payments for up to 60 days on vehicle loans or business equipment loans. For commercial mortgages, it offers forbearance. That’s almost the same as deferment: Skipping one or more monthly payments and making them up later.
SBA Borrowers
Relief on SBA-backed loans
A program from the Small Business Administration goes well beyond deferment. For SBA borrowers of 7(a), 504 and Microloans already in regular service, the SBA will automatically cover six months of principal, interest and fees.
A loan from the Paycheck Protection Program (PPP) needs no payment for six months, but interest accrues. Likewise, payments on an Economic Injury Disaster Loan (EIDL) can be deferred up to a year, but payments accrue.
Speak to Your Bank or Another Small Business Lender
Banks and other private lenders
You can almost always speak to your bank or another small business lender about loan deferment. The time you can ask for differs, but one to three months is typical. The lender decides on a case by case basis. If you don’t ask, you probably won’t get it. You may find the bank’s policy on the Internet. A few examples:
- Bank of America may defer payments on business loans and credit cards for 90 days to its small business customers. Clients can also ask for refunds of late fees. B of A will add deferred loan interest to the end of the loan. For its credit lines it adds accrued interest to principal after the deferral.
- BBVA grants up to three months of deferment on its business loans to clients that have been financially hurt by the COVID 19 pandemic. Applications can be made online.
- HSBC offers to let small-business customers postpone or reduce payments on term loans, credit lines and credit cards, and to have late fees waived.
Considering a Deferment
Should you ask for a deferment?
When you are considering a deferment it’s good to ask yourself these questions. Go over them with the lender, and ask questions too.
What happens to your credit?
Before agreeing to a deferment, ask the lender whether and how it will report the deferment to credit bureaus. Bank of America, for instance, doesn’t do any negative credit bureau reporting for clients who are current on payments when they ask for a deferment.
It’s better to call and ask for help before you miss a payment than after you are late.
Even if a lender doesn’t lower your credit score for a deferment, they may note your account as “deferred.” That can prompt caution from future lenders. A deferment is better than a late payment.
What deferring costs
Most loans keep accruing interest while payments are on hold. So it’s expensive if the deferment lasts a long time. It may not be so bad on a small loan, but it can get costly on a bigger one. Know your numbers, so you can decide where it might help and where it might hurt.
Looking at the whole picture
When you find yourself constantly scrambling, like playing Whack-a-Mole with your bills, you would be better off stepping back to see how they all fit together. Get a trusted adviser to review your whole situation. A good accountant will listen well and can put it all together. Start by asking a mentor or counselor at your Small Business Development Center (SBDC) or SCORE. These advisors give free help to small businesses.
When deferment only delays the inevitable
Some businesses just won’t survive COVID-19. If your problems also include collections, tax liens or judgments, you may be beyond the help of mere deferment. If you are looking into whether to close or restructure, it’s wise to at least consult a bankruptcy attorney.
Once your deferment is approved
Once your deferral is approved, keep its paperwork. Read it carefully and check the dates, including when payments will resume. Consider putting a note on your calendar a week or so before your first payment. Make sure that it’s paid. Be sure your credit reports show your deferment and not a late payment or default.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
