A lot of things can throw off a business plan, and one of them is a missed loan payment. It could be a seasonal cash dip, an unexpected expense, or just forgetting.
Missing a payment might not do much harm if you catch it quickly and explain the situation to your lender. But a series of missed payments could lead to default and some serious credit trouble.
A variety of bad things can happen if you miss payments, and exactly what happens depends on who your lender is and what you both signed when you got the money.
Grasshopper Bank’s head of SBA lending, Brennan Quenneville, says the actions a lender takes when you miss a payment can vary widely. One type of lender goes for liquidation or lawsuits quickly. The other type tries to solve the problem so they get paid and you stay in business. Which type you get depends on which lender you choose.
There are a range of things a lender may do next.
Not every consequence is equal. Extra interest and late fees are annoying but easy to fix. A frozen credit line, credit damage and default are harder to undo. Some of these outcomes compound over time, causing problems that last far longer than the original missed payment.
The first thing your lender will probably do is hit you with a late fee. How much it costs and when it kicks in varies by lender. Your contract should say what’s allowed. A small-business credit line from Wells Fargo, for instance, carries a late fee of $39, but it’s only $25 if your prior balance was under $100. If you were late at least twice in the past 12 cycles, the fee goes up to $50.
A grace period is a span of time a lender might give you to pay after your due date with no penalties. Don’t count on having one without checking. They don’t all offer them.
Some online lenders require that payments are made automatically from your business bank account. If your account has insufficient funds when the transfer is attempted, you may owe a late fee and an NSF fee. For example, Fundbox charges a $6 NSF fee on top of its late fee if you don’t have the money in your business bank account.
Many lenders apply interest to your balance every day that you don’t pay them, which means you’ll pay more interest if you make your payment later than you will if you make it sooner. An unpaid balance keeps growing until it’s paid.
Some lenders freeze your line of credit when you miss a payment.
For example, if you miss a payment on the weekly plan, Bluevine puts your credit line on hold until you make a catch-up payment equal to two weeks’ worth of repayments plus the late fee (5% of missed payment, $35 minimum), accrued interest and other fees.
If your payment is missed on your monthly plan, Bluevine will attempt to pull again in another week, for the current payment as well as next month’s interest, and any fees accrued.
After your catch-up payment, Bluevine reviews your account to determine your eligibility for further credit. Drawing is not automatic.
A late payment can damage your business credit right away, but not always. Fundbox reports to business credit bureaus monthly, so a payment that’s a few days late probably won’t show.
But the damage usually does happen if the payment goes too far past due.
Some lenders report business loans to the consumer credit bureaus and some don’t. If yours does, it probably doesn’t report a missed payment until you’re at least 30 days late. Pay up before then and your personal credit shouldn’t suffer.
After one missed payment, your lender may tell you that you’re now delinquent, and that you need to catch up to avoid more trouble. The problem compounds if you keep missing payments. Eventually, you could end up in default.
Default is much more serious than delinquency. If you default on a loan, the lender may start repossessing collateral, going after your personal assets or suing you for the balance.
Call Your Lender and Explain
When you miss a payment, call your lender and explain. They may agree to let you make the payment with no penalties. Don’t wait, because if it gets to 30 days you could really have a problem. Pay back what you owe quickly to avoid paying more interest than you should.
If you know you can’t pay a bill for months, tell your creditors that. Being honest about your financial trouble looks better than staying quiet and hoping they’ll forget. Where possible, put together a plan that shows where you’re going to get the money. Then, give it to your lender. They’re far more likely to work with you if they know you’re taking steps to solve the problem.
It helps to know what kind of problem you’re facing. Is it a timing issue, where a customer is late but will pay soon? Or is your business facing a harder problem to solve?
Lenders want to know where you’re going to get the money to pay them. If it’s going to be from your business, they want to see how that’s going to happen and hear you explain it in detail. Showing them that you have a workable plan, that you’re able to take control, gives them a lot more confidence.
Some lenders have ”hardship programs” for borrowers who are behind on payments. The faster you ask for one, the better, and it helps to come with an idea of what you’ll do to solve the problem. Options may include:
- Changing the repayment schedule
- Postponing payments for a while
- Cutting the interest rate
- Interest-only payments for a time
Stay on Track
Whether you’re behind on the loan or worried about falling behind, the tips below can help you stay on track.
Automatic payments are a great way to prevent missed payments, but you should still set an alert to check it worked and keep enough money in the account to avoid NSF fees.
Notifications from your lender are an easy way to keep track of due dates. If your lender doesn’t offer them, set reminders on your phone or computer to do it yourself. If it works for you, you could try setting alerts for a few days before the payment date, too.
Take a hard look at your cash flow and where the money goes. You’ll be able to spot where you can cut back. A little budget trimming might be all it takes to stay on track with your loan payments.
When you’re not sure what to do next, it could help to have a pro in your corner. A certified public accountant can offer you advice tailored to your business.
Options to Help with the Debt
If your cash flow problems won’t go away by themselves, refinancing and consolidation can help with the debt.
Which one makes more sense for you? The answer depends on the loans you have and what you want. Consolidation usually works when you’ve got several loans, while refinancing is best for one high-rate loan. Ideally, it’s best to do one of these sooner, before you fall behind on your loans. Keep in mind that a recent missed payment can make qualifying harder.
Refinancing is a new loan that pays off your old debt, hopefully with better terms that save you money and help your cash flow. It’s a good fit if your credit or your business history has improved over time.
Consolidation is a new loan that pays off several others. Consolidating multiple loans into one helps keep your debts easier to manage, and ideally it will save you money over time.
Even when the rates and terms are similar, consolidating a few loans into one helps by reducing the number of debts you’re responsible for.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
