Cash is tight for many small businesses as they navigate the changing economy during coronavirus. One option for helping to improve your cash flow and protect your credit is to get a loan deferment. This allows you to stop making loan payments for a period of time while you help your business get back on track.
Can you defer your small business loan? And should you? Let’s look at both questions.
Deferment Vs. Forbearance
First, it’s important to understand the terminology. You may have seen the terms “deferment” and “forbearance” and wondered what the difference is between the two. In the context of certain loans such as student loans, these terms have specific implications (including whether interest accrues). But in the context of a small business loan the distinction isn’t as significant and the terms are often used interchangeably.
Forbearance is defined in Nolo’s Plain English Law Dictionary as “Voluntarily refraining from doing something, such as asserting a legal right. For example, a creditor may forbear on its right to collect a debt by temporarily postponing or reducing the borrower’s payments.”
Deferment is similar in that it allows you to skip payments for a specific period of time, with those payments typically being deferred to a later date.
Those two actions may be one and the same. Look at how one credit union, Vystar Credit Union in Florida, describes their policy for commercial loan deferment on its website:
“Auto and equipment loans are eligible for up to 60 days deferral of payments. Commercial mortgage loan forbearance is essentially the same as a loan deferment, meaning members can skip pre-determined monthly payments for additional financial flexibility.”
SBA Loan Deferment
If you have an SBA 7(a), 504, or Microloan in regular servicing status (or you get one before September 27, 2020) the SBA will automatically pay 6 months of principal, interest, and any associated fees.
If you got a Paycheck Protection Program (PPP) loan, no payment is required for six months, though interest accrues. Payments on Economic Injury Disaster Loans (EIDLs) can be deferred for up to a year, but payments accrue.
Small Business Loan Deferment
Your bank or other small business lender may allow you to defer payments for a limited period of time; usually for 1 – 3 months. Many offer help on a case-by-case basis and you’ll have to reach out to them directly to find out what options are available. However a few lenders have shared their policies on their websites and these may give you an idea of the type of relief that may be available:
- Bank of America small business clients can request to defer small business loan and credit card payments, and request refunds on late fees. Small business clients can get a deferral of 90 days; for loans, interest continues to accrue and deferred payment added to the end of the loan; for lines, interest continues to accrue and added to principal balance when deferral ends.
- BBVA allows small business clients impacted by COVID-19 to request up to 3 months of small business loan deferment online.
- HSBC small business customers with business credit cards, lines of credit and term loans may request to have payments deferred or reduced, and get late fees waived.
Deciding Whether to Defer
Here are a few questions to ask your lender— and yourself— if you are thinking about requesting deferment:
How will it affect my credit?
Ask your lender or vendor whether the deferment will be reported on personal and/or business credit reports and if so, how will it be reported? Bank of America, for example, states there is “no negative credit bureau reporting for previously up-to-date clients.”
It’s worth noting that asking for hardship help before you fall behind is often better than waiting until you can’t make a payment.
Even if there is no negative credit reporting that directly impacts your credit scores, keep in mind that some lenders may include a notation that the account is in deferment, and a lender could view that as risky. Still, it’s better than a late payment.
How much will it cost me?
Most deferred loans will continue to accrue interest. Since the loan will take longer to pay off, that additional cost will affect your bottom line. On a small loan that may not be a big deal but on large loans the additional cost could be significant. You’ll want to know how that will affect your profitability so knowing your numbers will be critical.
How does deferment fit into the big picture?
If you are juggling multiple bills, trying to figure out what to do with each one may feel like playing Whack-a-Mole with your finances. While talking to your creditors isn’t a bad idea, you may need someone to help you review the big picture and help you put together a plan for moving forward. Your accountant may be a helpful resource. Or you may benefit from working with a Small Business Development Center advisor or SCORE mentor. Both organizations provide free assistance to small business owners. Find your local agency here.
Non-profit financial counseling agencies, such as those who are members of the National Foundation for Credit Counseling, can help you evaluate your situation and options for paying back your debt and provide guidance for your budget. Visit NFCC.org/smallbusiness or call 1-844-359-3792 for a free consultation.
Am I just postponing the inevitable?
Unfortunately not all businesses will survive the COVID-19 crisis. If your business is in dire straits, temporary deferment may not be enough. This is especially true if you are dealing with collection, tax liens and/or judgments. You may need to talk with a bankruptcy attorney instead to see whether it makes sense to wind down your business or restructure it with the protection of bankruptcy.
Sealing the Deal
If you decide to defer your loan and the lender agrees, carefully review any paperwork your lender sends you and keep a copy for your records. Make sure you set a reminder to make your next scheduled payment so you don’t accidentally pay late. Then monitor your business and personal credit so you’ll be aware of any impact to your credit reports.