What Are Interest-Only Business Loan Payments?
Interest-only payments on a business loan may give you short-term relief if you’re facing financial difficulties.
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Managing Editor If you’re having trouble making small-business loan payments, you may be able to work with your lender to temporarily switch to interest-only payments.
Interest-only payments are exactly what they sound like. Instead of paying both principal and interest on a small-business loan, you temporarily pay just the interest.
This reduces your monthly payments, sometimes by a lot. For example, if you’re paying $1,000 on a loan every month, with $800 going to principal and $200 going to interest, you might be able to cut your payment to just $200 during the interest-only period.
Making interest-only business loan payments can give you valuable breathing room during periods of hardship or transition, such as a slowdown in revenue, an unexpected cost or a major investment.
However, you won’t be chipping away at your loan balance, which means you’ll end up paying more in interest over the life of the loan.
At the end of the interest-only payment period, your monthly payments return to normal.
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When does it make sense to ask for interest-only payments?
Here are two situations where requesting interest-only payments may make sense:
You’re struggling to keep up with payments
If you’re worried about missing payments on a business loan, you may be able to negotiate interest-only payments for a short period of time.
This temporary relief can help you avoid defaulting on your business loan while you stabilize your finances. It can be especially helpful if you’ve already repaid a large chunk of the loan principal, since the interest portion of your payments will likely be smaller.
You’re expecting a lag between investment and revenue
If you’re funding a business investment that will disrupt your cash flow for a while, like renovating a storefront or launching a new venture, it can take some time for that investment to pay off.
To help bridge that gap, some lenders offer options for interest-only payments during the beginning of a loan. This allows you to keep monthly payments low while you work on turning that investment into cash flow.
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Pros and cons of interest-only business loan payments
Pros
Temporarily lowers monthly loan payments.
May help avoid missed payments or loan defaults.
Can preserve your relationship with your lender.
Cons
Increases total interest paid over the life of the loan.
May delay your payoff date.
Could require additional collateral or a higher interest rate during the interest-only period.
Not all lenders allow interest-only payments.
How to request interest-only payments
If you’re concerned about falling behind on a small-business loan, your lender may allow interest-only payments, but you’ll need to make a compelling case. Here’s how to prepare:
- Figure out your financial position. Determine how much relief you actually need. For example, if interest-only payments won’t be enough to help recover, consider other options such as modifying the loan’s terms.
- Reach out to your lender early. Contact your lender as early as possible, ideally before you miss a payment. This keeps more options open and shows you’re committed to repaying the loan.
- Make your case. Explain what your financial difficulty is, why it’s temporary and how you plan to get your business back on track. Be ready to provide documentation, such as financial statements or cash flow forecasts.
- Review the agreement carefully. If approved, ensure you understand and can accept all terms of the new agreement. Lenders may add conditions like additional fees, collateral or a higher interest rate during the interest-only period.
🤓 Nerdy Tip
Not sure what to say to your lender? NerdWallet offers a sample script for requesting a pause on business loan payments. While a pause differs from interest-only payments, you can use the script as your guide when kicking off the conversation. Consider other options
If your lender doesn’t allow interest-only payments, or you’re not sure if it’s the right choice, there are other ways to manage loan repayment challenges:
- Request a pause in payments. Instead of switching to interest-only payments, you may be able to pause payments altogether. This can give you greater short-term relief, though interest will continue to accrue during the pause.
- Use a business line of credit. A business line of credit can be a flexible way to cover loan payments, manage unexpected costs or bridge a gap in cash flow. Some lenders also offer interest-only payment options on lines of credit.
- Negotiate a loan modification. If your financial hardship appears long term, consider asking your lender to restructure the loan. They may agree to extend the repayment term, lower the interest rate or even reduce the principal balance.
- Refinance your loan. Refinancing can lower monthly payments if the new loan has a lower interest rate or longer repayment period. But it may increase the total interest paid over time and could contribute to a cycle of debt.
- Consolidate your debt. If you’re juggling multiple loans, a business debt consolidation loan could simplify repayment and reduce your financial burden if the new loan results in lower interest costs or a longer repayment term.
- Consider a zero APR business credit card. Because you won’t have to pay interest for a set time, opening a 0% APR business credit card and making minimum payments on it can be a good way to recover from a short-term setback. Just make sure you can fully pay back what you borrowed before the promo period ends. You’ll also likely need a personal FICO score of 690 or higher to qualify.
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