If you’re finding it challenging to meet your small-business loan payments, you might have the option to collaborate with your lender to temporarily switch to interest-only payments.
Interest-only payments mean that you only pay the interest on your small-business loan for a certain period. This can significantly reduce your monthly payments. For instance, if you usually pay $1,000 per month with $800 going towards the principal and $200 towards interest, switching to interest-only payments could lower your monthly payment to just $200 during this period.
Making interest-only business loan payments can provide you with some breathing space during tough times, such as a revenue slowdown, unexpected expenses, or a major investment. However, keep in mind that during this period, you won’t be reducing the loan balance, which means you may end up paying more in interest over the loan’s lifespan.
Once the interest-only payment period ends, your monthly payments will revert to the regular amount.
Here are two scenarios where requesting interest-only payments might be a good idea:
- Struggling to keep up with payments: If you’re concerned about missing payments on your business loan, you could negotiate interest-only payments for a short period to avoid defaulting on the loan while stabilizing your finances. This could be especially useful if you’ve already paid off a significant portion of the principal.
- Expecting a lag between investment and revenue: If you’re making a business investment that will temporarily impact your cash flow, like a storefront renovation or launching a new project, interest-only payments can help bridge the gap. Some lenders offer this option at the beginning of a loan to keep your monthly payments low as you work on generating cash flow from the investment.
Pros of interest-only business loan payments:
- Temporary reduction in monthly payments.
- Potential to avoid missed payments or defaults.
- Can maintain a good relationship with your lender.
Cons of interest-only business loan payments:
- Increases the total interest paid over the loan term.
- May delay the payoff date.
- Might require additional collateral or a higher interest rate during the interest-only period.
- Not all lenders offer interest-only payment options.
To request interest-only payments, you need to present a strong case to your lender. Here’s how you can prepare:
- Understand your financial situation: Determine how much relief you need and consider other options if interest-only payments aren’t sufficient.
- Contact your lender early: Reach out before missing a payment to explore your options and show your commitment to repayment.
- Present your case: Explain your temporary financial difficulty, how you plan to recover, and provide any necessary documentation like financial statements or cash flow forecasts.
- Review the agreement: If approved, ensure you understand and agree to all terms of the new agreement, which may include additional conditions.
If interest-only payments aren’t feasible or not the best choice for your situation, there are other ways to manage loan repayment challenges:
- Request a payment pause: Instead of interest-only payments, you might pause payments altogether for more short-term relief.
- Use a business line of credit: A business line of credit can help cover loan payments, manage unexpected costs, or bridge cash flow gaps. Some lenders offer interest-only payment options on lines of credit.
- Negotiate a loan modification: If your financial hardship is prolonged, ask your lender to modify the loan by extending the repayment term, lowering the interest rate, or reducing the principal balance.
- Refinance your loan: Refinancing can lower monthly payments if the new loan has better terms, but it could increase total interest paid and contribute to a debt cycle.
Remember, if you’re unsure how to approach your lender, BW provides a sample script for requesting a pause on business loan payments, which can serve as a guide for initiating the conversation.