Businesses that have taken out an SBA loan have options for deferring their repayment.
- A deferment gives SBA loan borrowers the option to modify or suspend their payments for a set period of time.
- During the coronavirus pandemic, the government passed legislation that extends deferments on SBA loans for up to two years.
- Loan deferments are a temporary fix to a cash flow issue. They aren't designed to improve a struggling business.
- This article is for business owners who are thinking about deferring an SBA loan.
A loan deferment is a modification or suspension of your monthly payments. With Small Business Administration (SBA) loans, your lender has the option to defer your loan payments, typically for up to about six months; however, the coronavirus pandemic has extended some of those periods. An SBA loan deferment is not a tool to help businesses that are struggling financially, but functioning normally. Instead, a loan is deferred when for some external reason – such as a natural disaster, global pandemic or construction on your business's street – your business can't make payments.
Jentri Smith, senior vice president of the SBA lending department with Houston-based Amegy Bank, said during Hurricane Harvey in 2017, for example, many business owners and employees whose businesses were in the destruction zone throughout Texas and Louisiana weren't able to stay fully engaged in running their operation as normal.
"To have that burden of knowing this payment is due as well, we just think, as a local bank and supporter of the local community, it was part of our duty to help the community not feel that pressure," Smith said. [Find out how to get an SBA loan with our guide.]
Why are loan deferments given?
Smith said that after Hurricane Harvey, business owners who asked for deferments on their SBA loans received a three-month break on their payments. In this case, Amegy offered relief to businesses that weren't even flooded to make up for the breakdown in normal economic activity.
The COVID-19 pandemic also brought relief to business owners needing to defer their SBA loans. As part of the 2020 CARES Act passed in during the early days of the pandemic, the SBA was authorized to pay six months of principal, interest and fees for all 7(a), 504, and microloan borrowers in good standing. For loans already in deferment, the SBA would start making the monthly payments once the deferment period ends. The payments are made automatically.
Additionally, the pandemic-related Economic Aid Act extended the deferment of payments beyond the six months laid out in the CARES Act. That assistance kicked in on February 1, 2021, and varies based on when your SBA loan was approved. For SBA disaster loan borrowers approved prior to 2020, they don't have to make payments on their loans until March 31, 2022. During the deferral period, interest still accrues on the loan.
Business owners who borrowed through the COVID-19 Economic Injury Disaster Program or EIDL have longer deferments. If you applied for the loan in 2020, you have 24 months of deferment. Businesses that apply in 2021 get 18 months of deferment.
Did you know? To help businesses during the pandemic, the government includes several deferment options within some of its relief packages.
It is important to note that deferments can be extended in non-disaster situations.
"Deferments are available to SBA borrowers under normal circumstances when they are suffering a temporary cash-flow problem," said Bill Manger, associate administrator for the SBA's Office of Capital Access. "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."
If your business is struggling because of a natural disaster or some other external reason and you can't make payments, it's important to be transparent with your lender and explore all options, including deferment. However, there are some important ways to mitigate the need for a deferment, like practicing healthy financial habits, exploring line-of-credit options in down cycles and maintaining a good relationship with your local lender.
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How do SBA loan deferments work?
Jim Ely, an SBA loan consultant based in California, said banks can make deferments at their discretion, but only for up to six months, or if there are emergency rules in place, such as those outlined in the CARES Act. To get approved for a deferment you must contact your lender. Before you do that, there are aspects of the deferment process you need to understand including the following:
If a business owner asks for a deferment, banks can decide to stop principal and interest payments, reduce overall payments, or set up interest-only payments so interest doesn't accrue during the period of missed payments. Regardless of how the bank decides to set up the deferment, it doesn't need to consult the SBA before doing so. This means business owners and lenders can work together to decide what's best for everyone involved.
"The guidance from the SBA is a lender may grant a deferment for up to six consecutive months," Ely said. "If we go beyond that initial deferment period, we've got a problem."
Some minor complications can arise if you ask for a deferment. Ely said some banks will sell SBA loans on a secondary market. If a local bank has sold a portion of an SBA loan on the secondary market, it can only provide a deferment period of three months. If your business requires payment deferrals beyond three months, the bank will have to work with the secondary market. This can make things complicated and lengthy.
- Another aspect to consider is how far into the loan term you are. Ely said some local banks could be apprehensive to grant a deferment if a business owner asks for one within the first 18 months of the loan being funded. This can signal early default to the SBA, which could then take a closer look at the loan and decide to pull its guarantee with the bank, according to Ely. This is highly specific to certain situations, but it's important to be aware of as you seek a deferment. The goal of a deferment is not to buy a business owner time, but to provide temporary relief to account for cash flow problems that are the result of some external issue. Ely said that business owners should approach deferments with this mentality.
"A deferment is to be considered a temporary solution to a temporary problem," he said. "If you've got a company that's swirling down the drain and there's no prospect of recovery, a deferment is not going to be a viable option."
Key takeaway: Deferments may be more difficult to obtain if your loan was sold on the secondary market or you haven't held the loan for too long. Deferments are designed to give business owners temporary relief not save a business.
What are other options besides deferment?
If you hope to get a deferment but run into roadblocks with your local bank, there is one other option you can explore to get through tough financial times. Ely mentioned that, depending on the type of loan you have and the agreement structure, the SBA allows borrowers to take out lines of credit against their accounts receivable. Sometimes, you can explore this option with the same bank that granted you the SBA loan. [Interested in an alternative small business loan? Check out our best picks.]
"The SBA allows the lender to offer the inventory and accounts receivable for an asset-based line where the borrower could possibly go out and get a small line of credit to get them through that period without the possibility of a need for deferment," Ely said.
He also said the best way to avoid rocky financial times is to constantly monitor your finances and check in with your lender on the documentation you're submitting. Deferments are good for special circumstances, but it's ideal to set up healthy financial habits regardless.
Matt D'Angelo contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.