If you’ve ever taken a business or personal loan from a bank, or you’ve bought an expensive item, and you’ve committed to paying for it in instalments, then you should be familiar with EMIs.
EMI, short for Equated Monthly Instalments, is the preferred method many of us use to make payments for high-value items in 2021. Though almost all of us know what EMIs are in theory, do you know the actual impact your EMI payments (or your ability to pay them) have on your creditworthiness? Let’s learn about that.
Things every SME should know about EMIs when getting an SME loan
- As mentioned above, EMI stands for Equated Monthly Instalments. When you get an SME loan, your lender does not expect you to pay back the amount you have borrowed in one go. Therefore, you can pay back the loan in pre-determined instalments every month.
- Your SME loan EMI is made up of a certain amount of the principal value you borrowed and the interest the lender is charging you for the loan.
- Most lenders provide their customers with an Electronic Clearing Service (ECS) payment option, which automatically debits your EMI payment from your account on the date the EMI is due.
- This ECS pull is done early in the morning on the due date.
- Every time your EMI payment bounces, you are charged a penalty known as an “EMI Bounce Charge”. The amount of this charge varies from lender to lender but generally ranges between Rs. 400 – Rs. 590.
- After the first attempt to electronically withdraw your EMI, you are charged the bounce charge. Then a second attempt to electronically debit the EMI is usually done 3 days after the first attempt.
- If on the second try, you still don’t have enough money in your account to cover the EMI, you are charged the EMI bounce charge again.
- You can pay your EMI instalment through other methods instead of an ECS, such as cheque, RTGS and NEFT bank transfers, or via a UPI-based payment platform like Paytm or GooglePay.
What happens if my EMI payment bounces?
Imagine the EMI payment for your SME loan bounces. Here’s what will happen next:
If your lender automatically debits the money from your account using an ECS pull, you will be charged an EMI bounce charge as soon as the ECS fails.
Lenders understand that technical delays happen or that you may be transferring the EMI amount from another account and may have faced some delay due to that. So, lenders will usually allow borrowers a 1-2 day grace period during which you can pay the EMI and not face any permanent consequences.
EMI payment bounces happen to the best of us, and there is no shame in that. It is your financial behaviour immediately after the bounce that matters.
Remember, you will still be charged the bounce fee, but the bounce will not harm your creditworthiness. If after the ECS payment bounces, you clear the EMI payment within 1-2 days via a different method, like an NEFT or RTGS bank transfer, cheque, or a UPI payment platform, the lender will recognise you’re a trustworthy borrower who did not intentionally avoid your financial responsibility.
If after 2 days, you’ve still not been able to clear your EMI dues, lenders begin to wonder whether you’re willingly withholding their money with no intention to pay them or that your business may be in a cash crunch. Both these situations are bad for your creditworthiness.
How does an EMI bounce impact my chances of getting an SME loan in the future?
Every time there is a bounce on your account, whether it’s an EMI payment or a cheque bounce, you’re charged a penalty, which is recorded in your bank account statement. And when you apply for an SME loan, lenders require you to submit your bank account statements for the past 12 months for their assessment. So, you know they will see the penalty charges on it.
When your EMI payment bounces, it gets recorded in three documents, your bank account statement, your loan account statement, and your credit bureau report. Therefore, bounces on your EMI, and the subsequent speed with which you pay the dues, determine your creditworthiness.
If your EMI payment bounces and you pay it within 1-2 days, the lenders will write it up to a technical issue or simple mismanagement of funds and not penalize you for it. However, if there is a longer delay or if more than one of your EMIs payments have bounced, lenders begin to question your creditworthiness. They will question whether you were intentionally withholding their money with no plans to pay them back or that your business is in (or may soon be in) a cash crunch. Both these scenarios increase the risk associated with lending to you.
It is more difficult for a high-risk business to get an SME loan. Lenders will worry about your ability to repay the borrowed amount, or they may agree to lend to you but only a small loan amount at a higher interest rate and a shorter loan tenor.
How do I avoid EMI payment bounces for my SME loan?
1. Transfer your EMI amount the day before it is due, not on the day of.
Lenders do EMI pulls first thing in the morning on the date your EMI payment is due. If you’re transferring the money from another account to the one from which you pay your EMI, it is good practice to do the transfer the day before the EMI is due. This will ensure that if there is a technical issue or if your transfer fails, you’ll have enough time to initiate another one, and you will not miss the first EMI payment ECS.
2. Maintain an average bank balance that is higher than your EMI amount.
Maintain an average bank balance that is equal to or more than your EMI amount. This lets the lender know you’re financially responsible, and you will never experience an EMI payment bounce.
3. If you pay your EMI via cheque, set an automatic reminder so you don’t miss the due dates.
This is simple. Anytime something is to happen according to a predetermined schedule, like an EMI payment schedule, make sure you set automatic reminders for yourself so that you don’t forget about it. Even if you have enough money in your account to pay the EMI, you don’t want to miss the date, pay the penalty, and have your lender chase you for their payment.
4. Communicate with your lender.
If, by some chance, you find yourself in a situation where you think you may not be able to make your EMI payment on time, let your lender know ASAP. Lenders appreciate honesty, and they want to help you succeed. If you’ve been a model borrower up till now, your lender may be willing to help you restructure your finances or figure out different ways for you to increase your cash inflow.
You’re a responsible SME, and you want to keep your creditworthiness high with lenders for the next time you apply for an SME loan. Keeping up with your EMI dues and other loan obligations increases your creditworthiness with lenders and improve your credit score.
Being financially responsible makes you eligible for a larger SME loan in the future with better loan terms that will help you achieve your growth quicker! At CreditEnable, many of our customers who applied for SME loans using our service have successfully repaid their loans and now qualify for larger loans with the same lenders we matched them with! You could be one of them!
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