It’s common for businesses to face setbacks, but these setbacks don’t have to lead to missed payments on a small-business loan. One option to consider is working with your lender to place your business loan in forbearance to prevent any financial derailment.
Forbearance provides a temporary pause or reduction in payments on a small-business loan, typically lasting for three to six months.
Think of forbearance as a safety valve for your business finances. It allows you to focus on getting your business back on track without the immediate pressure of making full loan payments.
However, to qualify for forbearance, you’ll need to present a compelling case to your lender. Additionally, any missed payments during forbearance will need to be repaid (with interest) once the forbearance period ends.
To better understand the unique needs of your business, we will begin with a brief questionnaire. Following this, our team will guide you through the next steps based on your personalized matches.
What occurs after the forbearance period?
Once the forbearance period concludes, you will need to resume regular loan payments and repay any missed principal and interest amounts.
Repayment of missed payments usually takes one of two forms:
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Add them to remaining payments. The missed payments are added to the remaining payments on your loan without changing the loan’s term. This results in higher monthly payments compared to before the loan entered forbearance.
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Pay it all at once. Alternatively, your lender may allow you to make a lump-sum payment for the missed amount at the end of the loan term. This keeps your monthly payments the same, but you’ll owe a larger final payment.
How does forbearance differ from deferment?
Both loan forbearance and deferment offer short-term payment relief through a pause or reduction in payments. However, with loan deferment, the repayment term is extended by the deferment period length, maintaining similar monthly payments unless interest or fees accumulate. In contrast, forbearance keeps the loan term unchanged regardless of how long the relief lasts.
When is business loan forbearance worth considering?
According to Kevin Janusz, vice president and SBA lending manager at Beneficial State Bank, you should only request forbearance if your business genuinely needs it. Lenders have heard various excuses for late payments or financial difficulties, so it’s crucial to have a valid reason.
Business loan forbearance may be beneficial if:
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Your hardship is temporary. Temporary financial difficulties, such as seasonal cash flow fluctuations, emergency equipment repairs, or recovering from a natural disaster, may warrant forbearance.
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You need immediate cash relief. Forbearance can provide vital cash flow to cover essential expenses, preventing missed payments or a potential business loan default. Maintaining liquidity during tough periods is crucial for business survival and stability, according to Mark Valentino, head of business banking at Citizens Bank.
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You have a positive history with your lender. Lenders are more likely to approve forbearance if you have a good relationship with them and have consistently made timely payments in the past.
Advantages and disadvantages of business loan forbearance
Your loan payments will be paused or reduced while you work to stabilize your business.
Can help you avoid missed payments or default.
Your lender might not allow it.
Missed or reduced payments still have to be repaid, either as a lump sum or spread over remaining loan payments.
Your credit score may take a hit.
It’s not a long-term solution.
How to request business loan forbearance from your lender
If you’re struggling with loan payments and need temporary relief, it’s essential to act promptly and communicate clearly with your lender. Here’s how to make your request:
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Reach out to your lender early. Don’t wait until you’ve missed a payment. Contact your lender as soon as you anticipate financial difficulties and be transparent about the issues you’re facing. Early communication can help build trust and provide more options for assistance.
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Prepare a turnaround plan. Lenders want assurance that your financial difficulties are temporary. Having a well-thought-out business recovery plan and supporting documentation ready can demonstrate to lenders how you plan to overcome the challenges. Honesty and a clear recovery strategy can help maintain a strong relationship with your lender.
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