Closing on a business finance often brings a sense of relief and excitement as you secure the funds to grow your business. However, it’s not uncommon to find yourself overwhelmed after a few months or years, realizing that you’ve taken on more than you can handle. With over one-third of Americans struggling with delinquent debt and the risk of finance defaults, taking immediate action is crucial when you fall behind on finance payments. This article provides essential information on delinquent finance, defaults, and practical strategies to protect yourself and minimize the associated damage.
Understanding Delinquent Finance
A finance becomes delinquent when you miss a payment, even in just one day. If you miss payments or cannot make them for an extended period (typically 90 to 120 days), the lender may classify the finance as default and initiate collection procedures. Both delinquent finance and defaults have negative implications for your credit. It’s important to note that the timing of your delinquency rarely matters. For example, if your payment is due on February 1 and the lender doesn’t receive it that day, the finance becomes delinquent on February 2.
Consequences of Delinquent Finance
The consequences of a delinquent finance depend on your lender’s policies and the terms outlined in the finance agreement. However, there are three typical outcomes:
- Penalty Rates & Late Fees: Finance agreements often permit lenders to charge late fees after a few days grace period. Some agreements also permit the lender to increase the interest rate on overdue amounts, known as a “penalty rate” or “default rate.” Late fee structures vary among lenders, so it’s essential to understand their specific policies to avoid surprises.
- Negative Impact on Credit Score: Once you are 30 days late on payments, lenders can report the late payment to credit bureaus. Beyond this period, a late payment can decrease your credit score by nearly 100 points. In addition, poor credit score makes qualifying for future business finance more challenging. Late payments can remain on your credit report for up to seven years, even if you pay the lender after the item is reported.
It’s worth noting that this 30-day rule does not apply to business credit reports, as lenders can report late payments to commercial credit bureaus even if you are just one day late.
Increased Contact from Lenders
When you have a delinquent finance, expect frequent calls and emails from your lender urging you to make payments. Lenders prioritize collection efforts while the deadline is fresh in your mind. As delinquency continues, it becomes more challenging for lenders to collect the debt.
Delinquent Finance vs. Defaulted Finance
A finance transitions from delinquency to default when you have an outstanding balance for an extended period specified in the finance agreement. Typically, lenders wait 90 to 120 days before considering a finance as default.
How to Identify Defaulted Finance
When a finance goes into default, the lender will send you a written notice stating that you have breached the finance agreement and must immediately repay the entire finance balance. The lender might also sell or transfer the debt to a collection agency, escalating collection efforts to recover the outstanding balance. If the lender believes they won’t recover the money, they can charge off the finance, removing it from their books. However, you remain responsible for paying the debt.
Actions After Default
The lender’s subsequent actions depend on whether the finance is secured or unsecured. Secured finance have collateral or personal guarantees backing them, while unsecured finance do not.
