What is a loan repayment holiday, and should you take one?

Running your own business is exciting, but unpredictable. Maintaining steady cash flow is a challenge most businesses face (82% of UK SMEs, in fact). And when cash flow is tight, and an unexpected bill needs paying, it can be very stressful, particularly when you have fixed loan repayments you must prioritise.

But there’s good news: many business owners have the option to take a loan repayment holiday. But what is a loan repayment holiday? What does it mean for your business? And is it a smart move to take one?

We answer all those questions and more in this guide.

What is a loan repayment holiday?

A loan repayment holiday is a formal agreement between you and the lender that lets you take a short break from making your monthly loan repayments. This break can last up to three months. But specifics are lender-dependent.

Holiday, deferral, or grace period: what’s the difference?

All of these options mean you can delay loan repayments, but they all serve different purposes.

Loan repayment holiday

A temporary break from your loan repayment schedule, helping you cope with short-term cash flow problems, typically partway through your loan, where interest still occurs.

Business loan deferral

Although it’s like a ‘holiday’, you can sometimes have interest-only periods or push certain repayments to the end of the loan term. It’s a more formal loan restructuring.

Loan repayment grace period

This usually happens at the start of your business loan. This can be a payment-free window (up to 90 days) that the lender offers to help you generate a return quicker; it can also be a few days after your payment is due, where you can make a payment without incurring late fees.

How do loan repayment holidays work for businesses?

Taking a repayment break helps businesses overcome temporary cash flow problems. But there are a few things you should consider that can affect the total cost of your loan:

You still accrue interest

Just because you don’t pay your loan instalments for a few months, doesn’t mean the interest disappears. Unfortunately, interest will still continue to build on the outstanding loan balance during your break.

Your future payments or loan term can change

The lender can either increase your monthly repayments or extend your loan term to help you repay the interest you accrued during the break period.

Not all business loans offer this

Not every business loan can offer you a repayment holiday. Whether you can get one will depend on things like your lender, the product you have, your repayment history, and how long you’ve had the loan for.

Four reasons you might need a loan repayment holiday

There are many reasons you might want to consider a loan with a repayment holiday:

1. Your business is seasonal. If you know your Christmas-based business will be much quieter over the summer months, you might want to consider a strategic loan repayment holiday to help you operate comfortably over that period.
2. Emergency business disruptions. Let’s say you have supply chain issues or equipment breaks, you can’t trade, so you might need to conserve cash.
3. Unpaid customer invoices. If you’re still awaiting a customer invoice payment for a large project you completed, you know it’s coming, but can’t quite make ends meet, you can consider a payment holiday.
4. Free up cash for investments. If you want to invest a little more cash into a new growth initiative, you can take a loan repayment holiday to free up some funds.

Key considerations before pausing payments

Before asking your lender for a holiday, always weigh up whether the long-term impact on your business is worth it. Consider:

The cost of borrowing will increase

When the lender readjusts your repayment schedule, your monthly payments will increase because you still need to pay the interest that accrued during your holiday. Can you afford this increase? The lender might not be able to extend your loan term, so you need to be sure you can afford repayments going forward by getting a quote from your lender.

Impact on your credit file

A payment holiday will remain on your credit file, not as a missed payment, but as a temporary arrangement. This can indicate to future lenders that you were struggling financially and make them hesitant to lend to you.

It’s a short-term solution

The payment holiday is only temporary, so if you need a longer-term business loan, then you might want to consider other options. Products like a revolving credit facility or invoice finance can help you manage continuous gaps in cash flow.

How to apply for a loan repayment holiday

If you think a loan repayment holiday suits your business, here’s how you can apply:

1. Talk to your lender about your options. The earlier the better; don’t wait until you miss a repayment.
2. Check your loan terms to see if they have a payment holiday policy.
3. Show your lender proof that your cash flow problems are temporary. They might want to see bank statements or cash flow forecasts.
4. Get written confirmation of when your payment holiday starts and ends, and what this arrangement will cost you, i.e. what your repayments look like after the break.

A loan repayment holiday can be a great safety net

Having flexible repayment options can be very useful when running a business. You never know what financial difficulties will crop up. So, even if you’re not considering a payment holiday right now, it’s a good idea to understand your lender’s policies, so you’re aware of all your options in case you need them.

If you decide a loan repayment holiday isn’t quite the finance you need to manage your cash flow, there are plenty of alternative loan options available. From invoice finance and unsecured business loans to cash flow loans and startup loans.

Compare all your eligible options using our free business loan comparison tool.

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