It can happen to the savviest of business owners. Unanticipated expenses arise. A customer doesn’t pay on time. External events like the weather drive down sales. As a result, you might find yourself unable to make a loan payment on time.
Late payments can hurt your personal credit score and your business standing with creditors, even resulting in collection efforts in some cases. If you find yourself in this position, follow these 3 steps to minimize the damage and get back on track.
The most important thing you can do if you know you’re going to be late on a loan payment is to communicate that to the lender before the payment deadline. A lot of borrowers mistakenly avoid the lender. According to Kristin King, Vice President of Rockford Bank and Trust, “There are ways that we can help customers that are experiencing cash flow difficulties, but I caution them to communicate with me early.” Keeping the line of communication open allows you to work with the lender to come up with a repayment plan and possibly avoid consequences, such as penalty interest rates and damage to your credit score.
The first thing the lender will want to know is why you’re late. Is it a temporary problem? Or has there been a fundamental change in your business that will cause you to continue to miss payments? Whatever the cause, be straightforward about why you will be late on the payment. That will calm the lender’s anxiety, so they won’t be as quick to report the late payment to credit bureaus or jack up your APR.
The next step is to explain to the lender what type of repayment modifications will help you get back on track. Sam Graziano, CEO of online business lender Fundation, says the following options may be available:
1. Defer and repay. For example, if you’re late on a $600 payment, the lender may allow you skip (defer) the payment this month and tack on $200 to your next 3 months’ payments.
2. Forbearance agreements to pay smaller amounts in each installment for the remainder of the loan.
3. Pay interest only for 60-90 days.
There’s no guarantee that a lender will offer you a payment plan, but they will usually be understanding if you haven’t missed payments in the past. If the lender offers a deferral, keep in mind that the missed payment will be added to the loan balance, so you’ll be paying more interest in the long run.
If you can reach some kind of consensus with the lender, the lender most likely will not report a one-time late payment to the credit bureaus. However, if you’re regularly late or are more than 30 days late without a repayment plan in place, most lenders will report you to the credit bureaus. This can hurt your personal and business credit scores. In addition, if you go 90 days or more without paying, the lender may initiate collection efforts (exact time frames for credit bureau reporting and collections depend on your loan agreement).
Missing a loan payment every once in a blue moon isn’t too big a deal, but if it happens regularly, that’s a sign that you can’t afford your monthly payments. In that case, you may want to refinance your business loan before you miss more payments.
Refinancing basically allows you to pay off your loan by taking out a new loan with a lower interest rate and/or longer repayment term. Typically, lenders will allow you to refinance only if you have a good credit score, so you should try to refinance before missing too many payments. If you’re interested in refinancing, a good place to start is the lender that gave you the original loan.
Refinancing has pros and cons that should be carefully evaluated. The primary advantage is that you get lower monthly payments if you refinance when there are historically low interest rates (like right now). You also get a longer repayment term to spread out your payments. The refinancing fees are the primary disadvantage, as they can sometimes displace any savings you get from lower monthly payments. In addition, you may be charged a prepayment penalty for refinancing your loan, which could again wipe out any savings you get from lower monthly payments.
If you can refinance at the right time and without paying a lot of fees, that can lower your monthly payments and save you money on interest.
A single late payment won’t do much harm, but if you regularly miss payments, lenders will report that to the credit bureaus. In addition, lenders will charge a higher penalty APR and late fees for tardy borrowers. Paying on time going forward will help fix those problems.
According to Credit Karma, payment history accounts for about 35% of your credit score, making it one of the most important factors in calculating your score. A late payment can stay on your credit report for up to 7 years. However, by paying bills on time going forward, you can slowly lessen the impact. A good way to force yourself to stay on track is to set up automatic monthly loan payments. That encourages you to keeps expenses low and your bank account as full as possible.
Late payments often trigger late fees or an increase in interest rates (called penalty APR). I recommend asking the lender if they can waive these penalties, particularly if this is your first ever late payment. Some lenders may have internal policies regarding penalty APR. For instance, many lenders will restore your original APR if you make a certain number of consecutive on-time payments (there is a law requiring lenders to restore your original APR after 6 consecutive on-time payments, but this law only applies to consumer credit cards, not to business loans).
Even if this is your first time missing a loan payment, you should carefully examine your business finances and figure out what happened to prevent a repeat occurrence. There are some changes you might be able to make:
• Set aside some “emergency business funds” each month to use when unexpected events happen.
• Cut business costs and overhead wherever possible.
• Regularize your cash flow. In Kristin King’s experience, “most business owners experience timing issues between collecting on accounts receivable and the due date of payments.” By requiring upfront payment or enforcing payment deadlines, you can stabilize your cash flow. Doing business with habitually tardy clients could be hurting you more than helping you.
• Choose financing that suits your business. Some types of financing, such as invoice factoring, are specifically designed to stabilize cash flow. We can help you find financing that fits your business needs.
Making changes to the way you do business now will prevent problems in the future.
It’s not the end of the world to be late on one loan payment, but it’s best to nip the problem in the bud so it won’t happen a second or a third time. Regain control by communicating with the lender, refinancing if the monthly payments are too high, and paying on time going forward. Selecting the right form of financing for your business is also key, and FitBizLoans can help you make an informed choice.
Fundation combines the benefits of a bank loan with the ease and efficiency of an online lender. We offer conventional loans with competitive rates to businesses with varying credit profiles. Our technology allows us to deliver capital in as few as 3 business days through streamlining the collection and evaluation of customer information and conducting the majority of the lending process electronically. As a direct lender, we use our own capital to originate and hold the loans we make, so that we can focus on building relationships with our customers. Our dedicated customer relationship model enables us to understand each unique borrower’s business. This level of service, coupled with our best-in-class products, is why many of our customers come back to us repeatedly for more capital.