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.
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“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.”
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.