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Hey guys, today I want to talk to you about loan modifications and deferments and update it for the year 2020. About 10 years ago, the landscape for loan modifications was very different than it is today. And so I think it’s important that we cover what’s different today versus 10 years ago.
When you’re business is unable to make it’s payment, it can lead to some major problems. So, the natural thing to do it turn to your bank for some help.
But before we talk about the current landscape for SBA loan modifications and deferments, I’d like to just start by defining a loan modification and a loan deferment because sometimes people use them interchangeably, but they’re actually not the same thing.
SBA Loan Deferment
So first let’s talk about a deferment. A deferment is typically something that’s short term in nature. The most common scenarios that I see are 3 to 12 month interest-only periods. Most commonly, I hear of 3 to 6 months periods where a borrower pays a reduced payment. In most cases they’re looking at interest only. There’s usually not a period where no payments are made. And the reason for that is if you don’t make any payment for say 6 – 12 months you’re going to accrue interest.
If you make a $0 payment for a while, once you start making payments again, it’s actually gonna make it much harder for you to repay your loan in full. Let’s say you’ve got a $1 million loan. 12 months of interest can amount to several hundred thousand dollars. And then on top of that you’re going to have one year less to actually repay your loan back. So in most cases it’s short term, 3 to 6 months interest only.
SBA Loan Modification
Let’s contrast that with a loan modification. With loan modifications, people are typically talking about something called a term extension. For most SBA 7a loans, the typical term is 10 years. And so a term extension would simply mean extending the loan maturity. So if I took a loan on January 1st, 2020 through the 7a program and it was a 10 year loan, my final payment would be due on, in 2030, or 10 years from now.
With a loan modification, what they’ll do is they will actually extend that maturity date. Let’s say two years from now, you go to the bank and say, “Hey, I’m having trouble making my payment. Can we lower it?”
They might extend that loan maturity out from the original maturity date of year 2030 out to say 2035 or 2040. You still pay, pay it back in full. There is no debt forgiveness in this scenario. You’re still paying the same interest rate on it. But you pay more interest in total because there’s more payments over time. It’s more spread out. So that’s the difference between a loan modification and deferment.
Should I seek a SBA loan modification or deferment?
In what situation would you need a loan modification versus a loan deferment?
Deferment = Short Term In Ability To Make Current Payment
A deferment is typically because it’s short term in nature, it’s typically for, you know, a situation where there’s some sort of anomaly, some sort of short term problem that once you get past, that things will return to normal. So typical uses for that I would say would be like if there was a flood a fire, maybe a hurricane and your business closes for three months while you repair your store and repair water damage, stuff like that. And then after that you’ll reopen and business will be as usual. And so it’s a short term fix because it’s not a situation where your business is permanently changed.
In contrast, if you closed the business, or if it has some sort of a fundamental change that’s gonna make you unable to make that payment over a short period of time. Now when you’re talking about a loan modification and extending it, that’s really more of a long term solution.
And so like going back to the example of a flood. A pipe burst and you’re closed for a month, that wouldn’t necessarily need to extend the loan maturity to lower the payment every month cause you can afford the payment. It just for those three months, you’re not going to have the cash flow because your store is closed. A loan modification where you’re actually extending the loan term, that’s more of a permanent thing.
Loan Modification = Long Term In Ability To Make Current Payment
A loan modification (more specifically, a term extension) would be good where if somebody buys a business and let’s say they lose a major customer. So now all of a sudden, they used to make a payment of $5,000 a month with no problem. Now that they’ve lost this customer, now they can only afford $3000 per month, and that’s not going to change. So if they had three months of a reduced payment, it wouldn’t help them in the long term because they really need to make that $3,000 payment for the rest of the loan term.
So that would be a situation where a loan modification would make more sense. So again, if it’s a long term need where the business will not be able to make the original payment for the life of the loan, then a loan modification really seems more appropriate. So that’s the, the difference between the two.
Who Approves These Things, Anyway?
So let’s say you do need a loan modification or a low deferment, the question always comes up, well, who needs to approve this? Cause I’ve frequently have people come to me, their lender has said, no, we’re not going to do it. And then the borrower will go to the SBA standard operating procedures and find it written that the SBA was actually open to these. So the question is, who’s responsible for approving these things? And the answer is, as long as the lender continues to service the loan, they’re always the one who’s going to have the first right of refusal.
So in other words, if the lender doesn’t want to do it, the SBA is not going to force them to. The SBA really relies on their lending partners to make these sort of day to day servicing decisions. Now let’s say the lender is willing to work with a borrower on a modification or deferment typically for a loan deferment. So that 3 to 6 period, typically any lender that is designated as an SBA preferred lender has the ability to approve a deferment without getting SBA approval. I’d have to double check, but I believe they would just need to notify the SBA that it was happening.
Contrast that with a loan modification. For a term extension, typically what needs to happen with that is the bank needs to approve it. The SBA needs to be notified, but if the loan is sold to investors on a secondary market, typically what has to happen is need to go to that investor, whether it be an individual or an institutional investor, to approve the changes in those terms.
And that can be difficult because, if they’re “bundled” (i.e. sold with hundreds of other SBA loans), some investors are not dealing with stuff on a daily basis. That’s too far into the weeds. But nonetheless, I have seen those sorts of things approved.
I realized what I wrote above about approvals can be confusing, partially because I’m out of the loop on modifications and deferments because it’s been a while since I’ve done one. Over, the easiest way to think about is that your lender needs to be on board with it. And if they say they don’t want to do it, there’s really nothing you can do regardless of who else would need to sign off on it. It’s still the lender. So that’s the important thing.
Can You Still Get A Loan Deferment or Modification in 2020?
So let’s talk about the current line landscape of 2020 versus a, say 10 years ago when I first started doing this. If you recall in 2010, we were just coming out of the great recession.
So in 2008, the economy collapsed and an unfathomable amount of businesses were behind on their loans and so many other businesses were closing. So many people were trying to settle their debt. The SBA and the lenders were really open to the idea of loan modifications and deferments. And I can personally attest to that because I worked on tons of them. We would put together a proposal, and show them that, based on a cashflow analysis, we can’t afford thecurrent payment, but we can pay the new proposed payment.
A lot of lenders were getting on board with that and they were approving both modifications and deferments. Fast forward to today guys. It’s is really difficult to obtain any sort of long term loan modifications approved by lenders. I do see deferments approved, but loan modifications are really difficult to come by.
Typically the calls that I get from people go like this: they call their lender and the lenders gives them either some excuse: the SBA won’t approve it, the investors won’t approve it. Or they’ll just outright say, “we’re not interested in working on this”. I even had someone say to me yesterday, their lender told them that they feel like, because the economy is currently so good, if they can’t afford their current payment right now in a great economy, that if things do take a downturn, it’s not going to be worth it for them to modify the debt because the business probably isn’t going to make it.
Conclusion
And so the landscape today really is that lenders are really not interested in doing them and generally it’s not something that I work on for that reason. So there you have it. That’s the loan modification and deferments update for 2020!
