SBA Loan Modifications & Deferments

The first principle that we must all understand is that the SBA defers all strategic workout 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 workout 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 3-6 months, usually done in two stages of 3 months at a time. There are instances of deferments being issued for longer time periods, but this is unusual. This may give the borrower temporary relief, but remember when the deferment is over, the monthly payment will be increased to absorb the 3-6 months of non-payment. The question is: Will the business be able to support the payment obligation once the deferment is over? Usually not.

As for modification of the deal, it is very difficult to convince the bank to do this, although we do see it happen from time to time. If it serves your needs then great, do it, but most often when you do the arithmetic, even a modified payment schedule does not meet the needs of the borrower.

Many banks will not participate in either plan and will move to liquidate as soon as you are in default.

Remember 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 can convince your banker to enter into either a modification or a deferral

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