Business Loan Payment Holidays: How They Work for UK Limited Companies

What a payment holiday actually means

A payment holiday — also called a capital moratorium or deferral — means the lender agrees to suspend the collection of scheduled repayment instalments for a fixed period. It does not mean the loan is interest-free during that time. Interest continues to accrue on the outstanding balance daily, and this interest must be accounted for somewhere in the restructured schedule.

How accrued interest is handled

Lenders handle deferred interest in one of three ways: capitalisation (adding it to the outstanding balance so it is repaid across the remaining term), a catch-up payment at the end of the holiday period, or an extended term with the same monthly payment amount. Capitalisation is the most common and the most expensive over time because the accrued interest itself attracts further interest — confirm which method applies to your arrangement before agreeing.

Conditions lenders typically apply

Payment holidays are discretionary, not contractual rights. Lenders will usually require: a clear business reason for the request, evidence that the difficulty is temporary, satisfactory repayment conduct prior to the request, and an agreed resumption date. Some lenders will grant a holiday only once per facility; others assess each request on its merits. The agreement must be in writing, specifying the deferral period, the interest treatment, and the revised repayment schedule.

Impact on remaining term and total cost

A three-month payment holiday on a five-year facility with capitalised interest does not simply add three months to the end. Because the interest capitalised increases the balance, all remaining instalments are slightly higher. Model the revised amortisation schedule before agreeing, and ask the lender to provide a full revised repayment table as part of the deferral documentation.