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Dangers of payment holidays on asset loans & other funding | Speirs Finance

The danger of payment holidays…

Anyone would jump at the chance for a free holiday and at the onset of COVID-19 and during the initial extended lockdown, many did just this when offered payment holidays on asset loans, finance agreements and other forms of funding. This applied to both personal and business finance to provide some financial relief in a time of great uncertainty with a high degree of market disruption.

 And just as COVID-19 has changed our view on holidays and travel and there are new risks to consider when holidaying, the same applies to finance any form of asset loan. Finance payment holidays generally took the form of either:

  •  A complete holiday (no payments) for a set time, typically no more than 6 months; or

  • Interest Only payments for a set period, typically 3 – 6 months

  •  As time has shown us, while some sectors were severely adversely affected (travel, tourism, education) there were many businesses who returned to either normal or near-normal trading patterns and whatever your situation some of the key considerations and dangers with payment holidays are:

  •  Artificially improved cash flow – with reduced payments for a period of time, this has left many individuals and businesses with more cash than they may normally would have and an inflated sense of well-being. With extra cash there is always the temptation to either take it out of the business or spend it, only to find that as payment holidays ended that the cash should have been kept in the business to meet asset loan and other commitments.

  • Asset values reducing faster than loan values – where businesses particularly are highly geared, and early on in any asset loan or finance agreement, there is always a risk that the asset is depreciating faster than the loan value but when payments cease being made or dramatically reduced this can very quickly lead to negative equity in your assets.

Whatever your situation, it is a time to be more conscious about finances, personal and business and with businesses more regular monitoring of financial performance and your cash position is critical. It is also key to maintain a good relationship with your funders and to work with financial institutions that demonstrate the capacity to add value to your business and provide helpful guidance.