Maybe you just haven’t been collecting much money lately, and a cost you didn’t expect hit. Or maybe you just dropped the ball and let a payment get away from you. Whatever the reason, you missed a payment on your small-business loan. A single missed payment shouldn’t have any long-term negative effects, as long as you notify the lender and get things sorted right away. If you keep missing payments, things can get more serious - potentially resulting in a default and a hit to your credit. There may be other repercussions, too, and they will vary depending on your lender and the terms of your loan agreement.
Not All Penalties Are Equal
How a lender reacts when you miss a payment depends on the lender, said Brennan Quenneville, SBA loan head at Grasshopper Bank. Some lenders go from one missed payment to liquidation or lawsuits. But other lenders will try to understand what the problem is and help you find a solution. Not all penalties are equal: A late fee or interest charge is often easy to fix. But the snowball effects are bigger: A credit line that gets frozen, or even your credit score that gets damaged. (Miss enough payments, and the snowball turns into a risk of default.)
The first thing you are likely to see is a late fee, and you can see what you’re liable for by reviewing your agreement. Search your documents for “late fee” and you’ll know your immediate financial impact. Miss a payment on a Wells Fargo line of credit for your small business, and the bank will charge a $39 late fee. (Unless your previous statement balance was less than $100, in which case the late fee is just $25). If you’ve been late two or more times in the last 12 billing cycles, the fee jumps to $50. Some banks give you a grace period during which you can avoid the late fee by making the payment, but not all of them do.
Some online lenders now tie their loans directly to your business bank account. This means if you don’t have the money when the payment is due, the lender may apply a nonsufficient funds fee on top of a late fee. For example, Fundbox adds a $6 nonsufficient funds fee to your late fee.
Many business loans charge interest each day on your remaining balance. If you miss a payment, your interest charges (and possibly a late fee) keep piling up until you pay. So the longer you take to pay, the more interest you’ll ultimately pay over the life of the loan.
If the payment you missed was on a business line of credit, some lenders may freeze your credit line for the time being, so you cannot borrow any additional money from them. If you don’t make a payment on Bluevine’s line of credit, your account will be frozen until you make a catch-up payment. Under the weekly plan, the catch-up payment will be two weeks’ worth of repayments, plus a late fee of 5% of the missed repayment (or $35, whichever is higher) plus any interest and fees that have accrued. Under the monthly plan, Bluevine will try to withdraw the payment the following week (at a higher amount that includes interest for the next month and any fees). Once the payment is made, Bluevine will review the account to determine whether you can continue to draw funds.
Then there is your credit. A missed payment can hurt your business credit score right away, though not always. With lenders such as Fundbox, late payments get reported to the commercial credit bureaus once a month, which means paying a few days late probably won’t hurt your business credit. A lot of lenders don’t even report business loan payments to the consumer credit bureaus. Of the ones that do, they usually don’t report until you are at least 30 days late, and if you make the payment within that window your personal credit likely won’t be affected. If you are at least 30 days late on a small business loan payment, your credit could take a hit. And the longer you go without paying, and the more payments you miss, the worse the hit to your business credit is likely to be.
Normally, if you miss a payment on your loan the loan will be marked as delinquent, but as soon as you make up the payment the loan is again considered good. However, if you keep missing payments the loan will probably go into default. After the loan is in default, the lender could take possession of whatever is securing the loan or go after your personal assets or take legal action against you. That is why it matters so much what you do next. A single missed payment doesn’t immediately mean you’re in default and the bank is coming to take your business.
Communicate Openly
If you missed a business loan payment, tell your lender what happened and why you were late as soon as possible. If you can make the payment right away, you might be able to avoid late fees and extra interest. Paying within 30 days might also minimize the damage to your credit score. If you can’t make the payment right away, communicate openly with your lender. Not only should you tell your lender about the missed payment, but you should be able to show them that you have a plan in place to resolve it. If you can, reach out to them before they reach out to you and let them know what’s happened. The reason to do this is because it shows the bank that you’re being proactive and you haven’t intentionally neglected your responsibility. Don’t lie, and don’t make up a story either, just tell them the truth.
Quenneville said lenders like to hear from customers who are struggling, but what they really want to know is how the issues will be resolved, whether it is a timing issue that will clear up by next week or a larger operational problem requiring meaningful change. The more proactive you are and the more clarity you can bring to the situation, the more likely the lender will be to offer you an option to modify your payment schedule, defer your payments for some period, lower the interest rate, or allow you to make interest-only payments for a period.
Keep It from Happening Again
Once you are caught up, the goal is to keep it from happening again. One way to make sure you never miss a loan payment is to set up autopay with your business bank account. That way you won’t forget or accidentally enter the wrong payment amount. But autopay means you have to keep your bank account loaded up enough to cover the payment. If you don’t want to do autopay, ask your lender if they have the option of sending you email and text reminders of your due date. Another option is to set up reminders on your phone or computer. Regularly reviewing your cash flow and spending patterns will help you make sure you have enough to cover your loan payment. If you don’t have a healthy cash flow, find areas where you can cut costs. A certified public accountant can give you suggestions.
When you know the payments are going to be tough for a while, you can either refinance or consolidate. Consolidating means combining several loans into one payment, and refinance is a good option if you’ve got one loan with a high rate. A recent late payment can make it tough to qualify, so think of these as proactive options rather than last-ditch efforts to rescue a really bad month. Refinancing is getting a new loan that pays off your existing one, and makes sense if your personal credit has gone up since you applied the first time, or if you have been in business longer than when you took out the original loan. Consolidating debt means taking out one new loan to cover several existing ones. When you have one loan payment instead of many, it’s much easier to stay on top of your finances and avoid late payments. The best deal gives you a lower interest rate or better repayment terms. To get those better terms, you need to show the lender that you’ve gotten stronger than when you took out your original loans. You might not be able to get better terms, but if you get the same rate and terms as the old loans, that could still be a win.
To sum up, missing a single business loan payment rarely amounts to a major problem. The time the missed payment becomes an actual crisis is when you go 30 days and don’t address it, and then you miss the next payment and you miss the one after that until your loan defaults.
