No business owner plans to miss a loan payment. Unfortunately, even with all precautions being taken, many companies still fail to make their repayments on time. If you've taken out a loan and you're struggling to meet the due date, this article outlines what course of action you should take. We also explain the difference between loan delinquency and loan default and offer four strategies to avoid late payments.
If you own a small business, chances are you've taken out a loan. Whether to increase your working capital or help you invest in necessary inventory or equipment, external financing can be an invaluable way to lift a venture off the ground. However, while business owners have every intention to pay back their loans in full, the business landscape can be unpredictable. Unexpected bills, cyber-attacks and crises like the Covid-19 pandemic are just some curveballs that can cause businesses to miss their due date.
While missing payments can be stressful, business owners shouldn’t bury their heads in the sand. If you’re struggling to meet business loan repayments, this article outlines some ways you can take control of the situation. But first off, let’s cover the difference between loan delinquency and default.
DELINQUENCY VS DEFAULT: WHAT’S THE DIFFERENCE?
If you’re an inexperienced borrower or from outside the UK, you may not understand the difference between different types of missed payments. Discerning the difference between delinquency and default is important as the two differ in severity and can have different consequences on your company’s credit history.
Delinquency refers to when a borrower misses their payment date. Payment delinquency occurs as soon as an individual or entity misses a loan, and it can occur after a singular missed payment. Until the payment is made, the loan status will remain delinquent. While singular missed payments don’t stand to hugely impact your credit history, consistent late payments are much more likely to affect your creditworthiness.
When a borrower fails to repay a loan for a certain period or misses several payment dates, this is known as default. While the time will vary from lender to lender, the period typically ranges from one to several months. Your credit status will be much more seriously affected when you default. In most cases, evidence of default will stay on your company's credit report for up to six years.
If business owners can settle this debt, this will prevent them from being pursued through the court system. It won't, however, improve their credit rating. The good news is that loan defaults are extremely rare in the UK, and numbers are dropping annually. Also, borrowers are notified long before their loan defaults, so they will have ample time to resolve the issue before the situation progresses.
WHAT SHOULD I DO IF I CAN’T MAKE A PAYMENT?
Now that you can tell apart delinquency from default, here's some advice on handling missed payments.
If you miss one
When it comes to failing to meet payments, communication is key. Lenders often track thousands of business loans at once, so if you think you may miss a future payment, it's best to notify your lender as soon as possible.
While reaching out may be nerve-wracking, most lenders will try to accommodate your situation. Depending on their flexibility, they may even push back your payment date or freeze your payments until you can afford them. Not only will this offer you peace of mind and give you time to figure out a reasonable solution, but it also helps you stay on positive terms with your loan provider.
If your loan becomes delinquent
If your loan becomes delinquent, your lender will notify you. They will likely want to know why a payment was missed and when you’ll make the payment. In this case, honesty is the best policy. Just explain your current circumstances as clearly as possible, and they will do what they can to help you rectify the situation.
Most lenders will charge as soon as a loan becomes delinquent, so be prepared for this. Depending on the financial provider, this could include issuing one-off fees or imposing a new penalty rate. To establish when these charges will take place and how much may be, you should figure out your lender's policies by visiting their site or talking to a team member.
If you have the means to pay off your delinquent loans, your loan can become current again. This means you can avoid defaulting and potentially damaging your business’s credit profile.
If you default
If you default, your business has likely encountered serious cash flow difficulties. Chances are you're already in contact with your provider. But just like in the case of loan delinquency, you should keep lines of communication with your lender open and regularly update them about your financial situation.
If your business cannot pay back a loan, one of two things can happen. In the context of a secured loan, your lender will seize whatever assets you offered as collateral. This could include possessions like property, vehicles or business equipment.
Alternatively, if your loan was unsecured, you can't be forced to offer up collateral in the place of missed payments. However, it’s likely your financial provider will go through a debt collection process to try and recover the losses. What's more, in the case of personal guarantees, loan collectors will have the authority to collect whichever personal assets are listed in the contract.
Unfortunately, business owners can't remove a loan from default in most instances. In some cases, however, debtors will offer business owners a debt settlement plan. This will allow businesses to settle their debt for less than they originally owed. While this option provides a lifeline to many borrowers, it's likely to ruin their company's credit profile and make it harder for them to receive credit in the future.
Due to the serious nature of defaulting, businesses should try to avoid this fate at all costs. To lower the chances of a loan becoming delinquent or defaulting. Next, we cover how businesses can stay on top of their payments.
4 WAYS TO AVOID LATE PAYMENTS
1. Plan ahead The decision to take out a loan should never be made lightly. Before business owners consider sourcing financing, they need to thoroughly assess the state of their company’s finances. This should include monitoring current income and expenditure, creating a cash flow forecast and working out a contingency plan should you have issues meeting with repayments in the future. If you cannot guarantee the long term financial security of your business, it may be worth exploring other forms of funding.
2. Select your loan carefully
A surprising amount of loans are available to small businesses in the UK. While some offer reasonable interest rates and payment terms, others can come at a greater price. Therefore, if you decide to move forward with business financing, you should find the most affordable option for your business. In addition, you should consider if you're looking for secured or unsecured types of finance, as this will impact the conditions of your loan.
3. Understand the loan agreement
Reading the small print is never interesting. However, if you haven’t brushed up on your loan agreement, there’s a chance it could come back to bite you down the line. Loan agreements include a range of critical clauses and terms on things like repayment and interest. Skimming the details could put you in a vulnerable position and increase the chances of being caught out by unexpected payments and fees.
What’s more, since a loan agreement is a legally binding document, failing to understand its terms could also see you end up in legal hot water. Therefore, to keep the threat of default as low as possible, you need to fully understand your loan agreement.
4. Set up a direct debit
Often, businesses fail to meet payment deadlines because they simply forget. While this usually isn’t a mistake someone makes twice, an easy way to resolve this issue is by setting up a direct debit to your lender. By ruling out the chance of forgetting, you can ensure your repayments will always be sent on time. Before you do this, however, you should make sure you regularly have enough capital in your main account to cover these payments.
ACCESS AFFORDABLE FUNDING AT MARKETFINANCE
As this article makes clear, defaulting on a loan should be avoided at all costs. Not only does it permanently damage your company’s credit score, but it also rules out the possibility of future financing. Therefore, if you’re looking for business financing to set up a business or take it to the next level, you should only consider affordable solutions.
MarketFinance offers a range of cost-effective loans designed to help business owners resolve their cash flow issues. We don't believe in hidden fees, and we'll let you know the costs of your loan upfront. If this sounds like something that could benefit you, visit our website to find out more.
FREQUENTLY ASKED QUESTIONS (FAQS)
What’s a delinquent loan?
Loan delinquency refers to when a borrower misses their payment date. Payment delinquency occurs as soon as an individual or entity misses a loan, and it can even take place after a singular missed payment. Until the payment is made, the loan status will remain delinquent. While singular missed payments don’t stand to hugely impact your credit history, consistent late payments are more likely to affect your creditworthiness.
What's loan default?
When a borrower fails to repay the loan for a certain period or misses several more payment dates, they default. While the time will vary from lender to lender, the period typically ranges from one to several months. Your credit status will be much more seriously affected when you default. In most cases, evidence of default will stay on your company's credit report for up to six years.
What should I do if I miss a business loan repayment?
If you expect to miss a loan repayment, you should contact your lender and let them know. Most lenders will try to be accommodating of your situation. Depending on their flexibility, they may even push back your payment date or freeze your payments until you can afford them.
What should I do if my business loan becomes delinquent?
If your loan becomes delinquent, your loan lender will notify you. They will likely want to know why a payment was missed and when you’ll be able to send the funds over. In this case, honesty is the best policy. Just explain your current set of circumstances as clearly as possible, and they will do what they can to help you rectify the situation.
What should I do if my business loan defaults?
If your loan defaults, it’s likely that your business has encountered some serious cash flow difficulties. Chances are you’re already in contact with your provider. But just like in the case of loan delinquency, you should keep lines of communication with your lender open and regularly update them about your financial situation.