Introduction
Applying for an MSME loan or a small business loan can make the business owner handle the expenses incurred in the business, so most business owners will have to borrow loans to expand or run their businesses. If a business owner borrows a loan, he needs to repay it through EMIs, commonly known as Equated Monthly Installments.
Sometimes, a business owner might suffer a financial risk and fail to pay an EMI. This failure is referred to as an EMI bounce. Missing to pay these EMIs can lead to a lower credit score rating. A low credit rating can make you face more difficulties in future borrowings that are essential for growing the business.
This article will tell what the business loan EMI bounce is, and how it impacts credit score and financial health.
What is a Business Loan EMI Bounce?
An Sme loan EMI bounce is a situation where your EMI becomes undeducted as you cannot pay the amount due. The reasons may be various. For example, you may not have enough money in your bank account to meet the amount deducted as EMI, or you might forget to maintain the required funds in your bank account. Technical issues at the bank end are yet another reason for the non-deduction of the payment, and there could be many more reasons as well. Whatever the cause behind the EMI bounce is, it is considered as payment default to the lender.
So it is always important that these payments are made one day before the EMI due date, and your lender expects you to pay them promptly. Failing to pay the EMIs will attract penalties from the lender.
It should be known that a single EMI bounce can bring too serious issues to you and your business. Not only do you have to pay penalties, but the credit score also gets affected which may cause problems when you borrow money in the future from any financial institution.
What are the Consequences of Business Loan EMI Bounce?
Credit Score Impact: A three-digit number that signifies your creditworthiness, or how reliable you are at paying off loans. Normally, an excellent credit score falls between 700 and 900. It helps lenders to know how risky it is to lend you money. A bounced EMI reflects badly against the credit score because it reduces the scores and also informs the lenders that you may not be able to return the borrowed loan amount. The last thing you want would be to see a decreased CIBIL score when you/potential finance lender checks your CIbil/credit score. To avoid such a negative impact you should avoid the bounce of EMI payments.
When you have a bad level of credit score, you will not have much chance of approval for any future loans. If you do manage to get approved for a business loan, then the borrowed amount has higher interest rates and strict loan terms.
Penalties and Fees: The lender adds a fee as a bouncing charge for failure to make an EMI payment. The bouncing charges can be fixed or sometimes it may be a percentage of the EMI. If you miss the payment or fail to pay the EMI all the charges like late payment fees, cheque bounce charges, etc will be continuously added till the borrower pays the pending charges and EMI amount.
For example, if your EMI is Rs.500 and the bounced EMI incurs a penalty of Rs.50, you would have to pay Rs.550 in the following month. Your fines will keep adding on each missed payment, making it very difficult to bear the additional cost over the borrowed business loan amount.
Legal Action: In case you continuously default on your EMIs, your lender can take legal action against you. This is generally a last option, but a very serious consequence of failure to repay your loan. The lender may file a case against you to recover the outstanding amount that you owe them, thereby increasing your legal fees and expenses. If left with no choice, the lender will even take some of your assets such as properties, machinery, or other equipment your business holds for the purpose of debt recovery.
Legal action may damage your company’s reputation and cause a bad impact. Don’t miss to talk to your lender if you find yourself in a situation where you can’t pay the EMI on time.
Difficulty in Future Borrowing: When the lenders note that the EMI payments have defaulted, they might not lend money to you for future requirements. Even if they do provide it, they may charge a higher rate of interest and short repayment periods which again pose a challenge for the business. This makes borrowing more expensive and presses additional stress onto your business finances.
It might also make it very hard to negotiate better terms on other financial products, be it credit cards or business lines of credit. This is because lenders will look for evidence that you can be reliable and capable enough in managing your finances and a history of missed payments indicates to the lender that you are a bad customer to them.
Conclusion
A bounce in a business loan EMI is like an apparently small issue but its after-effect is quite large. Just because of missing one EMI, your credit score gets hindered, and thus, you are denied further loans, charged with higher interest rates, and in extreme cases, may be taken to court. So, it is very crucial for the business owner to keep an eye on the loan repayment for avoiding all these ill effects.
Applying for a business loan from NBFCs is a great choice as they often offer flexible loan terms, quicker approvals, and easier access to financing, helping businesses manage cash flow and grow sustainably. There are NBFCs who are available who provide business loans for low credit scores as well, but a responsible financial management, including timely EMI payments, is essential for any successful business expansion or availing of any business loans.
