Business loan forbearance explained

Forbearance is a temporary agreement with your lender to pay less, or pause payments, on your business loan for a short period, usually because the business is going through a passing hardship. It doesn't erase the debt: in almost every case interest keeps building and whatever you don't pay now gets collected later. A grace period, by contrast, is the window of days your contract gives you after the due date before a late fee kicks in.

This guide explains the difference between grace periods, forbearance, deferment and modification, how the SBA's hardship plan for COVID EIDL loans works, how to ask your bank for relief, what to do if you have a merchant cash advance, and the mistakes that turn a bump in the road into a bigger problem.

Grace period, forbearance, deferment and modification: the difference

These terms get used as if they meant the same thing, but they don't. Knowing which one to ask for saves time:

Some loans also come with an initial grace period: months at the start of the loan when you pay nothing or interest only, for example while a space is being built out. That's different from forbearance because it's in the contract from day one. If a short pause is what you're after, our guide on whether you should defer your small business loans walks through the trade-offs.

COVID EIDL loans: the SBA's payment reduction plan

If you have a COVID EIDL (COVID-era Economic Injury Disaster Loan), the SBA offers a plan for temporary hardship. According to its manage your EIDL page, checked October 2026:

• What it gives you: payments reduced to 50% for six months.
• How often: once every five years.
• Requirements: the loan must be less than 90 days past due and in active status; the business must be open and operating; neither the borrower nor the owners can be in an active bankruptcy; and the hardship must be temporary, such as a cash flow problem.
• How to request it: through the SBA's loan portal (lending.sba.gov). For loans approved above $200,000, the SBA points to a different channel while the portal isn't available for those loans; check its page.
• The cost: interest isn't forgiven. It keeps accruing during the six months, which makes the final balloon payment at the end of the loan larger.

The SBA also warns that after 120 days past due, a loan may be referred to the Treasury for collection, and once it's transferred, the SBA can no longer help you. That's why it pays to act before you reach that point. Since October 1, 2025, payments are electronic only.

SBA 7(a), 504 and bank loans: how to ask for relief

On 7(a) and 504 loans, and on any bank or credit union loan, forbearance is your lender's decision, not yours and not directly the SBA's. Here's how to ask the right way:

1. Call before you fall behind. A lender has more options with a borrower who's current than with one in default.
2. Explain the cause and how long it will last. A delayed public works project outside your door, a big customer who will pay in 60 days, a location closed for repairs. Temporary hardships with a clear end date get approved most often.
3. Bring numbers. Recent bank statements, your sales for the last few months and a simple projection of when you'll be back to normal.
4. Propose something specific. For example, interest-only payments for three months, or half payments for a short period. A clear proposal gets evaluated faster.
5. Get the agreement in writing. It should state what you'll pay, for how long, what happens to interest and how the skipped amount will be repaid.

If the problem isn't temporary, you may need a modification or a refinance instead. Read how to refinance a business loan to see whether a longer term could lower your payment.

If you have a merchant cash advance (MCA)

A merchant cash advance isn't a loan with fixed installments, so it doesn't have forbearance in the banking sense. Many MCA contracts do include a process to revisit the payment when your sales drop, sometimes called reconciliation or adjustment. The goal is to lower the payment so it reflects your actual sales.

• Read your contract and find the adjustment or reconciliation clause.
• Request the adjustment in writing, with bank statements showing the sales decline.
• Don't go silent or close the account to block debits without an agreement; that can trigger default clauses.
• Don't take another advance to cover the first one: the holdbacks stack up.

We walk through it step by step in our guide for owners who are behind on MCA payments.

What to include in your written request

After the call, send your request by email or through your lender's portal. A short, organized letter gets reviewed faster. Include:

1. Your details and loan number, with the business's legal name exactly as it appears on the contract.
2. The cause, in two or three sentences. For example: "A commercial client that represents a large share of our sales has delayed payment until March."
3. When you expect to recover and why: signed contracts, peak season coming up, the location reopening.
4. Your specific proposal: what payment you can make and for how many months.
5. Your proof: recent bank statements, the client's outstanding invoice or the repair estimate.
6. Your commitment: that you'll keep paying what you can and send updates.

Keep a copy of everything you send, and note the date, time and name of everyone you speak with. If the lender only answers by phone, follow up with an email summarizing what you agreed.

What pausing payments costs (and when it's worth it)

Forbearance isn't free, even if there's no fee. Be clear on the price:

• More total interest. Interest usually keeps running, so the cost of the loan goes up.
• Higher payments later or a bigger final payment. What you don't pay today gets collected later, through bigger installments, a longer term or a lump sum at the end.
• Possible credit impact. A formal agreement usually does less damage than a late payment, but ask how your lender reports it.
• Conditions. Some agreements require you not to take on new debt during the period, or to send bank statements every month.

It's worth it when the hardship is temporary and you know when it ends: a slow season, a repair, a client who will pay late. It doesn't fix a business that no longer covers its costs; in that case, talk to an accountant or a free advisor at your local Small Business Development Center.

Common forbearance mistakes

• Waiting until you're far behind. At 90 days or more past due, many options disappear, as with the SBA's COVID EIDL plan.
• Accepting a verbal agreement. If it isn't in writing, it doesn't exist when there's a problem.
• Forgetting automatic payments. A reduced-payment agreement doesn't always stop scheduled auto-debits on its own. Ask your lender and review your authorizations.
• Stopping all payments. While you negotiate, pay what you can. It shows good faith and keeps the past-due amount smaller.
• Ignoring the final payment. If your balloon payment grows, put it on your calendar and plan how you'll cover it.

If the hardship is a cash flow gap and your business is still selling, working capital can bridge inventory or payroll while you recover. Merchant Fund Express, our recommended funder, reviews your sales and deposits, not just your credit, accepts applicants with an ITIN (no SSN needed) and offers Spanish-speaking support. If it works as a bridge for your operations, you can apply with Merchant Fund Express; it's free and won't affect your credit. Prefer Spanish? Leer en español.