(Distressed Loan Advisors offers expert advice about SBA loan modifications and the Offer In Compromise process, and can be reached at JasonTees.com)
If business has been tough lately, (and let’s face it, if you were open in 2009, this applies to you) and you need some help, SBA lenders generally offer two varieties of help: deferments and modifications.
Deferment: A loan deferment is typically more short term in nature than a modification. Generally lasting for up to 12 months, a deferment can be viewed as a short term “band-aid” that allows a borrower to abstain from making full contractual payments. Some lenders will allow full payment deferment (i.e. $0 payment), an interest only deferment, or some other reduced amount. After the deferment period expires, you will be expected to resume regular contractual payments. The deferment is a “first line of defense” when it comes to SBA Loan Workouts, so unless your lender thinks that your problems are long term in nature, that’s often the first form of relief you’ll be offered.
Modification: If a deferment is a “band-aid”, then a modification can be considered to be “surgery”. The goal of a modification is to permanently change your loan terms in order to permanently reduce your monthly payment. There are a few basic elements of a loan that could possible be changed:
- The Rate – While not impossible, a rate change is unlikely. The main reason is that many SBA loans are sold to investors. Since the investor agreed to buy the loan at a certain rate, an investor will rarely agree to a rate reduction. Additionally, if a lender were to use risk-based pricing, lowering the rate on a defaulted loan would be out of the question.
- The Term – Out of these 3, a lender is most likely to look at extending the term of your loan, thereby reducing the payment. For example, if you have a 10 year loan, they might look at extending it to 15 or 20 years.
- The Principal Balance – Writing off principal is not an option if you want to keep your business open. The SBA does have a settlement process, but in order to qualify, a business must cease operations and all business assets must be liquidated (some exceptions do exist).