When an MSME business owner borrows funds for day-to-day business operations or expansion, they are expected to repay the amount in monthly installments spread over the agreed-upon loan tenure. However, sometimes MSMEs may miss EMI payments due to insufficient balance in their accounts. When an EMI bounce occurs, it brings some serious repercussions for the business, especially in terms of its creditworthiness. This article outlines the impact of business loan EMI bounces on a business and highlights strategies to help avoid it.
Understanding Business Loan EMI Bounce
Before we proceed to what happens when your EMI bounces, let’s understand the meaning of a business loan EMI bounce. EMIs or equated monthly installments are the stipulated loan payments you make every month to repay the borrowed business loan amount. An EMI bounce occurs when the business does not have sufficient balance in its account to cover this scheduled loan payment. This may happen due to various reasons like late payment from customers, cash flow disruptions, sudden emergency expenses, or even technical issues at the bank.
Regardless of the reason, when an EMI bounce occurs, the lender classifies the same as a payment default on the part of the borrower. Depending on the terms of the loan, the lender levies EMI bounce charges for the same. Repeated EMI bounces can increase the overall cost of the loan because business owners now have to service both these EMI bounce charges as well as the outstanding loan amount. To avoid extra EMI bounce charges, it is always best to ensure your EMI payments are made at least a day before the due date. Aside from EMI bounce charges, there are certain long-term consequences of such defaults. EMI bounce can impact the creditworthiness of the business making future access to credit more difficult.
What are the Consequences of Business Loan EMI Bounce?
Here’s a quick overview of what happens when your EMI bounces:
- Impact on your Credit Score: An EMI bounce essentially indicates to lenders that you may not be able to repay the borrower loan amount. In other words, it signals poor creditworthiness. Records of missed EMI payments and bounces also limit your eligibility for future business credit. A low credit score with EMI bounce records classifies you as a risky borrower. A damaged credit score can have long-term repercussions. Lenders may reject your loan applications outright or sanction loans at exorbitant rates to balance out the risk of a poor repayment track record.
- Penalty Charges: Lenders charge an EMI bounce charge each time you fail to make an EMI payment. These bouncing charges can be fixed or they be charged as a certain percentage of the EMI amount. Addition of EMI bounces charges plus late payment fees can increase your total cost of borrowing. Lenders will continue to add these charges unless you clear the EMI amount, resulting in spirally debt obligations.
- Legal Action: The lender reserves the right to take legal action if you continuously default on your EMI payments. While this is typically a last resort for most lenders, it is still a very serious and possible consequence of missing EMI payments due to insufficient balances. In this case, the lender will file a case against you to recover the borrowed sum. Engaging in a legal battle with the lender will also result in mounting legal fees and expenses. If you have obtained a secured loan, the lender also reserves the right to seize the pledged assets including properties, machinery, and equipment. Aside from all this, legal action also damages your company’s reputation and overall credibility in the market.
Effective Strategies to Reduce the Negative Impact of Business Loan EMI Bounce
Instead of wondering what to do if your EMI bounces, you should look for ways to avoid such situations. In simple words, the best way to avoid the negative impact of a business loan EMI bounce is to ensure regular payments. Here’s a list of easy strategies you can use to avoid EMI bounce charges and other negative repercussions:
- Set Payment Reminders: Set payment reminders on your phone and calendar to mark your EMI dates. Instead of setting one reminder, you can set multiple reminders leading up to the due date. This way you can check your bank account balance before the due date to ensure you have the funds needed to make the EMI payment.
- Track your Cash Flow: Maintain a specific cash reserve for business loan EMI payments. Manage your business cash flow effectively to ensure you have enough cash to cover EMI payments and avoid EMI bounce charges.
- Borrow Within your Means: Use a business loan EMI calculator to compute your monthly installments prior to applying for the loan. Ensure that you have the repayment capacity needed to cover the loan repayment within the stipulated period.
- Restructure your Loans: If your business is facing persistent cash flow issues, consider renegotiating the terms of your loan. Try talking to the lender about lower interest rates or an extended repayment tenure to make your EMI burden more manageable.
- Consider Refinancing: You can also consider refinancing your business loan to make the EMI payments easier.
Conclusion
Business loans offer access to required capital to help MSMEs grow their ventures and meet working capital requirements. However, EMI bounces on business loan repayments can have a significant toll on the financial health and creditworthiness of the enterprise. Having insufficient balance to meet EMI payment obligations can attract EMI bounce charges as well as damage your credit score, compromising chances of securing future credit on favourable terms. As a responsible borrower, you must understand what happens when EMI bounces to adopt effective strategies to avoid the same.
FAQs
What happens when a business loan EMI bounces?
When your business loan EMI bounces due to insufficient funds in your account, the lender imposes an EMI bounce charge. Moreover, EMI bounces also negatively impact your credit score, making it difficult to secure credit on favourable terms in the future.
How can I prevent EMI bounces?
You can prevent EMI bounces by setting up payment reminders and maintaining enough cash reserve in your business loan account around the EMI due date. Other strategies like borrowing within your means, tracking your cash flow, and refinancing your loan can also help avoid EMI bounces.
What are EMI bounce charges?
EMI bounce charges vary from one lender to the next. They may be charged as a flat fee or as a percentage of the outstanding EMI amount.
