Repayment holiday

In plain terms

A repayment holiday — also called a payment break or payment deferral — is a period during which a lender agrees you can stop making your normal repayments. It's arranged in advance and for a set length, often one to three months.

The crucial point most directors miss: a repayment holiday is not free money and it's not forgiveness. In almost every case, interest continues to build during the break. You're deferring the obligation, not removing it. When the holiday ends, you either repay the deferred amount over the remaining term (raising future payments slightly), or the loan term extends to absorb it. Either way, the total cost of the loan usually goes up.

Why it matters to your business

Used deliberately, a repayment holiday is a genuine cash-flow tool. A seasonal business might agree a break through its quietest quarter; a company investing in a large order might pause repayments until that order pays out. Pausing an outgoing for two or three months can be the difference between comfortably funding growth and scrambling for cash.

Because interest keeps accruing, the right question is always: does the breathing space now justify the extra cost later? If the pause lets you capture revenue you'd otherwise miss, it's usually worth it. If you're using it simply to delay an unaffordable debt, it can mask a deeper problem — in that situation, a conversation about refinancing is often the better route. Whether a holiday is available, and on what terms, depends entirely on your agreement and lender; it's not an automatic right.

A worked example

A company repaying a working-capital facility wins a large contract that requires upfront spend on materials, with payment due 90 days later. It agrees a two-month repayment holiday to keep cash free for the materials.

Interest still accrues across those two months, so the balance edges up. When the customer pays, repayments resume — slightly higher, or over a marginally longer term, to clear the deferred amount. The modest extra cost is comfortably covered by the profit on the contract, which the holiday made possible.

Things to check before agreeing one

Before taking a repayment holiday, confirm:

• Whether interest accrues during the break (it almost always does)
• How the deferred amount is repaid — higher payments afterwards, or a longer term
• The total extra cost over the life of the loan
• Whether the break is reported anywhere that affects your business credit profile
• The maximum length available and how much notice you need to give

Get the new figures in writing so there are no surprises when payments restart.