What to do if you can’t pay off your business loan on time

With the prevailing economic crunches due to Coronavirus, chances are that you are cash strapped. Your business is bleeding, if not in a coma already.  If you fail to make on-time payments, your loan goes into default. Loan defaults lead to poor credit ratings (credit score).

Missing further payments may lead to incurring other penalties and incurring interests. Legal action may follow if the situation is not adequately addressed. Other lenders, depending on the type of loan, will move to repossess your goods, stock or assets.

Here are a few things you could do.

1. Renegotiate credit terms

If you think you’ll be late on a payment, you can try to let the lender know ahead of time to see if they’ll work with you to make payments more manageable. 

Select an income-based payment plan, that allows you to pay exactly what you can make in a month. Taking a lower amount will lengthen your payment period and perhaps increase your interests, but it will give you a good credit score.

If you agree to change the terms of your contract, it’s important to get it in writing.

A credit manager at Ufanisi Finance Limited advises that if you are renegotiating the loan terms, clearly seek to understand and think through the weight of the resultant change in the cost of borrowing because the new instalments may be manageable, but the new overall interest you are to pay are very high for your business.

2. Talk to a credit counselor

The key is to work with a reputable counselor who’s not just trying to sell you something. You can find one at your bank and is available to you at no cost at all. Depending on your situation, your counselor may suggest a debt management plan or another course of action.

3. Learn your rights as a borrower

Get to know your rights as a borrower. Read and understand the terms and conditions of taking a loan. If you really can’t come up with the instalment payments, no matter what plan you had put in place prior to that, call a lawyer and file for bankruptcy.

Bankruptcy could solve your problems, but there might be better alternatives. 

4. Deferment

If the situation is dire, like you have lost your job or even closed your business, consider taking a deferment. Deferment works best mostly if you are a student and you took a student loan and you aren’t able to pay in time.

A loan deferment simply postpones your starting time of repayment of the loan. Most likely the interest will accrue. The normal grace period for deferment is three years. 

5. Consolidate or refinance

You might be better off with a different loan. This is, however, only advised when dealing with ‘toxic’ loans like credit cards and payday loans, consolidating with a personal loan results in lower interest costs and a lower required payment. Plus, a new loan typically gives you more time to repay.

6. Prioritise your payments

You might need to make difficult decisions about which loans to stop paying and which ones to keep current on. Conventional wisdom says to keep making payments on your home and other loans, and to stop paying unsecured loans (like personal loans and credit cards) if you must. The rationale is that you really don’t want to get evicted or have your vehicle repossessed.

Damage to your credit is also problematic, but it does not instantly disrupt your life in the same way. Make a list of your payments, and make a conscious choice about each one. Make your safety and health a priority as you choose.