SBA Loan Deferments: What They Are and How to Qualify

What are loan deferments?

A loan deferment is a modification or suspension of your monthly payments. With SBA loans, your lender can defer your loan payments, typically for up to about six months; however, the SBA has occasionally extended some of those periods. 

An SBA loan deferment is not a tool to help businesses that are struggling financially yet 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. You also can’t have your loan deferred in the case of an external event you could have predicted or prevented, such as a cybersecurity breach.

Jentri Smith, vice president of the board of directors at HAGGL and SBA Lending Manager at Amegy Bank, said that 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 payment break. In this case, Amegy offered relief to businesses that weren’t even flooded to compensate for the breakdown in normal economic activity.

Similarly, as part of the 2020 CARES Act passed during the early days of the COVID-19 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 started making the monthly payments once the deferment period ended. The payments were made automatically. [Related content: How SBA loans differ from conventional loans] 

Additional deferment rules applied for certain SBA disaster loan borrowers. To qualify, borrowers must have received financing approval before 2020, with a loan in regular servicing status as of March 1, 2020. These borrowers were granted loan deferment until their payment closest to and before March 31, 2022, with interest still accumulating during the deferment period. Regular payments resumed after the deferment period ended.

Furthermore, in March 2022, the SBA announced loan deferments for all SBA COVID Economic Injury Disaster Loan (EIDL) participants. All SBA COVID EIDL borrowers whose loans were approved in 2020, 2021 or 2022 received an additional 30 months of deferment, effective upon announcement. Interest still accrues during this deferment period as well.

It is important to note that deferments can be extended in nondisaster situations.

“Deferments are available to SBA borrowers under normal circumstances when they are suffering a temporary cash-flow problem,” said Bill Manger, mayor of Southampton, New York, and managing director of Brock Capital. “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, such as practicing healthy financial habits, exploring line-of-credit options in down cycles and maintaining a good relationship with your local lender.

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 when emergency rules are 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.

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. The bank will have to work with the secondary market if your business requires payment deferrals beyond three months. 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. According to Ely, this can signal early default to the SBA, which could take a closer look at the loan and decide to pull its guarantee with the bank. 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 resulting from 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.”

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 your loan type 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. [Are you interested in a small business loan? Check out our picks for the best business loans.]

“The SBA allows the lender to offer the inventory and accounts receivable for an asset-based line where the borrower could 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.

SBA loan deferments are lifelines ― but only in certain situations

When your business experiences financial obstacles entirely out of your control, such as a natural disaster, SBA loan deferments can make all the difference. You’ll get to pause loan payments for at least six months, helping you restore your cash flow when so much else is blocking that goal. Of course, you’ll have to start paying again eventually and your loan will likely still accrue interest. But a payment pause is better than no relief at all.

Max Freedman and Matt D’Angelo contributed to this article. Some source interviews were conducted for a previous version of this article.