4 Ways to Lessen the Damage from a Late Loan Payment

20 Oct, 2016 / Comments: Comments Off on 4 Ways to Lessen the Damage from a Late Loan Payment / By

Even the most successful business owner can find himself in financial trouble due to circumstances outside of his control. Expenses that come out of nowhere, customers that do not pay their bills, and uncontrollable external events can affect your income. When this happens, you might have trouble paying your bills on time. Here are four ways to lessen the damage that a late payment causes for your business.


1.  Talk to Your Lender

The first thing you should always do is talk to the lender. Many people make the mistake of avoiding the lender at all costs. They avoid phone calls and do not go into the bank unless they absolutely need to go there. Unfortunately, this can cost you in the long run. The lender typically has ways to work with you to help you figure out how to pay your loan payments. When you are honest with the lender, they can provide you with special programs, such as interest-only payments or deferred payments. They cannot offer this to you unless you are honest about your financial situation, though. They need to work with you to figure out what you can afford and if you can rectify the loan.


2.  Refinance Your Loan

If the loan terms are too expensive to afford, talk to your lender about refinancing. If your current lender is unable to provide you with a different loan, shop around with other lenders. Successful refinancing requires you to think ahead, though. If you know the payments are hard to afford, start looking into refinancing before you make any late payments. You need a good credit score to refinance in most situations, so the earlier you act, the better. Find a loan with a lower interest rate or longer term to decrease your payments to help make them more affordable.


3.  Ask for a Grace Period

Some lenders offer businesses a grace period after a missed payment. You need to ask the lender what that grace period is, though. For example, one lender might provide a 5-day grace period while another provides a 15-day grace period. This gives you a few extra days to get your payment in without suffering the consequences of a late payment. If you pay outside of the grace period, the lender generally charges a late fee or increases your APR, called the penalty APR.


4.  Create a Forbearance Agreement

A forbearance agreement seems like bad news, but in reality, it helps you avoid the damage late payments can cause. When a lender knows that you have an agreement in place and that you will work hard to get your payments back up to date, they are less likely to jack up your APR or charge you astronomical late fees that you cannot afford. The forbearance agreement allows you to pay your late payments in small installments so that you can better afford to get current on your loan.


Always remember that honesty is the best policy with any lender. No matter how bad your situation is right now with your business loan, talk about it. There are many options that the lender can offer you, but they cannot do that if you do not tell them why you are late. Your situation might be temporary, which will help your case when it comes to paying late fees and higher interest rates. The lender can only assume the worst when you do not talk about it, though. Let the lender know why you cannot make your payments and how you plan on making it up for the best results and least amount of damage to your business credit.

William Mahnic
William Mahnic is a Finance Professor at Case Western University and has spent more than 20 years in the finance industry before becoming a professor. Mahnic has appeared as a commentator on both TV and radio talk shows including NPR, Crain's Cleveland Business, WKYC 3 and The Washington Post. He has been interviewed in BusinessWeek, Wall Street Journal and The Los Angeles Times.

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