SBA Loan Modifications & Deferments
In most cases, the SBA defers all modification and deferment decisions to the bank which originated the loan. The bank makes all decisions and has total control over what happens to your loan once defaulted.
The SBA supports and endorses a cooperative effort between the banks and the borrowers. However the approach is left entirely to the bank, and they are frequently far more aggressive than they are required to be. More so than what the SBA wants them to be, but under almost no circumstances will the SBA intervene on behalf of a defaulting borrower, leaving the modification decisions to the bank.
Therefore loan modifications and deferments are totally up to the bank and may be permitted at their discretion.
It is a stated policy that a bank may defer payment or require interest only for 3-9 months, usually done in stages of 3 months at a time. There are instances of deferments that are issued for longer time periods, but this is unusual. It may give the borrower temporary relief, but when the deferment is over, the monthly payment will be increased to absorb the 3-9 months of non-payment. This type of relief is good for businesses experiencing seasonal cash flow issues or one-time drops in revenue. It is not a good solution for businesses experiencing long-term reduced revenue or increased expenses.
Modifications offer long term relief but to become qualified for this can be difficult. Before pursuing a deferment or modification, you should seek the advice of a professional as each process has its built-in risks which include:
Liquidation: If you provide documents proving that you cannot repay your loan as agreed, the result can easily be that the bank rejects your deferment or modification request and choose to liquidate you instead.
Exposing your assets: Providing the documentation necessary for a modification or deferment identifies all of your assets (cash, accounts receivable, etc.) and if the bank denies your request, you have laid out a road map for them to collect against your business forcefully.
Balloon Payments: Deferments or modifications can result in large balloon payments becoming added to the loan which will cause future default for most businesses, and because the loan was already modified, the business will not qualify for further assistance when that default occurs.
Many banks will not participate in either plan and will move to liquidate as soon as you are in default.
Remember that the bank will receive it’s guaranteed pay off covering their losses upon liquidation of the collateral, so their incentive is to be aggressive and liquidate, not to be cooperative and work with you. If you would like to learn more, please read our blog post on SBA Loan Modifications.