- June 23, 2022
What if a bad credit borrower fails on an unsecured business loan?
Getting a business loan with a bad credit rating means borrowing money at a higher interest rate. Business loans do not work as emergency loans. A lender would like to look over your past journey to know how well your business is doing. Your business profitability helps a lender assess your repaying capacity. You will have to show your business plan if you are a start-up.
Credit history is an essential factor that a lender cannot ignore. Despite the fact that your business is doing well, a bad credit rating can keep you from securing a deal at attractive interest rates. As unsecured business loans are not subject to collateral, your bad credit history increases the risk of the lender, and therefore you get money at a higher interest rate.
A rule of thumb says you should improve your credit rating before applying for unsecured loans for bad credit. However, there are circumstances when you cannot wait for too long, and you apply for the loan. As you know that business loans do not act like emergency loans, you will have to pay them back in fixed monthly instalments.
The repayment length depends on the amount of borrowed money. There are no multiple repayment methods that you can pick from, like interest-only payments and standard payments. You just have to pay down one instalment every month that goes toward the interest and the principal as well.
What happens when you make a default on an unsecured business loan?
Regardless of the type of loan, you are not supposed to make default. It is a situation when you fail to pay off your debt. Default on a business loan will also attract penalties and late payment fees. However, you cannot be declared a defaulter if you have just missed one payment.
A lender will not report your missed payment to credit reference agencies if you clear your dues within a period of 30 days. However, interest will accrue, and late payment fees will be charged. However, some lenders provide a buffer period of seven to 14 days to clear outstanding dues so as to help you dodge late payment fees, but interest will accrue for this period.
When you make three to four defaults constantly, a lender will likely be suspicious about your repaying capacity, and they will be forced to take specific action against you. As it is in the lender’s best interest that you repay the debt, they will not immediately drag you to the court. Therefore, first off, they will chase you with emails, messages and phone calls to remind you about payments.
They will also admonish you for continuing defaults. The rule says they cannot turn to the court until they send you a notice clearly stating the repercussions of your defaults. If you do not turn to these notifications, your lender will transfer your case to the debt collection agency.
Now they will be responsible for collecting the owed amount as much as possible. You are not supposed to rebuff their messages and reminders. They will ask you about the reasons for making a default. Give them a true reason, as this will help them negotiate with your lender to reduce the repayments.
Before they make a decision, they will look over your financial situation. A debt collection agency may be successful in reducing your total debt, or they may convince a lender to put you on revised terms and conditions.
It ultimately depends on the lender what new repayment method they will offer you. If nothing works, a county court judgement will be issued against you, and then you will have to follow the orders of the court. Note that once a CCJ appears on your credit report for six years, making it is almost impossible for you to borrow money until it is removed.
Your score can be in the “very bad credit” range. Your assets can also be acquired so the lender can liquidate them to get money back. Defaulting on your unsecured business loan can brutally damage your credit rating. In some cases, it may debar you from taking out a new loan, and if you manage to borrow money from private lenders, you will end up paying an outrageously higher interest rate.
Tips for avoiding a default on an unsecured business loan
If you are worried about defaulting on an unsecured business loan, you should take the following steps before you lose the full control over your situation:
- Set aside the repayment amount
Business loans are usually available at fixed interest rates, which mean you know how much money you are to pay every month. Set by the repayment amount as a new month begins. Business cash flows are very dynamic.
You cannot be sure if you will have enough money in your reservoir by the due date. Treat this amount as a minimum balance, and never let your account go below this amount. Choose an auto-debit mode, and the lender will automatically pull it on the due date.
This whittles down the chances of falling behind the repayments. In the future, if you need to apply for loans for single mothers on benefits, you can get them at affordable interest rates.
If you do not have an auto-debit mode facility, you should set reminders on calendars. You do not need to remember when your repayments are due. Setting reminders will keep you from missing the due dates.
- Talk to your lender
If you feel that you will not be able to arrange money by the due date, you should immediately inform your lender. A missed repayment will cause late payment fees and other penalties. You are supposed to inform your lender about your financial complications before the due date.
This shows that you take your financial responsibility seriously. You can escape late payment fees by informing them earlier. They will likely offer you a revised repayment method based on your current financial situation. You can also consider refinancing your loan if your lender is not able to offer you a favorable revised plan.
Refinancing may sound counteractive, but this will extend the repayment term making the size of monthly payments small. Though it will cost you more in total, it will help you manage your debt more efficiently. Since refinancing extends the repayment term, interest will accrue for the extended period.
Therefore, you will end up paying more money in the form of interest. Note that when you refinance your unsecured business loan, you can do it with the same lender, or you can apply with another lender. Whatever the option you choose, a lender will go through your credit report and financial statement.
With a good credit rating, you may be able to get the most competitive interest rates. As you may have been paying down the debt on time, it will have boosted your credit score.
The bottom line
If you make a default on an unsecured business loan, you will end up paying late payment fees and interest penalties. A lender can also turn to debt collection agencies to get their money back, and if that does not work, they will issue a county court judgement.
This will affect your credit score brutally. As a result, you will not be able to borrow money at affordable interest rates until a CCJ is removed and your credit score heals. It is always suggested that you take out these loans when you have an excellent credit rating.
This will help get money at very competitive interest rates. However, if you have premonitions about being behind your repayments, talk to your lender immediately to get a new repayment method. Refinancing is also an option, provided you are able to leverage lower interest rates.