If you have ever gotten an SME loan, you may be aware of what an EMI is. When you take out a loan from a lender, they don’t expect you to pay back the entire amount immediately or in one go. Instead, you are required to repay the loan in monthly instalments, over a set period. These monthly instalments are known as EMIs or Equated Monthly Instalments. EMI is a method of payment using which lenders determine a fixed payment schedule for borrowers to pay back a loan they’ve lent them.
SME loan EMIs significantly impact your creditworthiness and can affect your chances of getting a business loan in the future. Let’s find out how.
How do I pay my EMI?
Your EMI amount is the sum of the principal amount and the interest being charged by the lender divided over the repayment period of your SME loan.
You are required to pay your SME loan EMIs each month according to the schedule that was decided when you signed your SME loan contract. The longer your loan repayment period, the lesser the value of your EMI due every month, but it also means you will be paying those EMIs for a longer time.
For example, if you take a loan of Rs. 6 L, with a repayment period of 12 months, you’ll be paying 12 monthly instalments of Rs. 50,0000 (plus interest). If, however, your repayment period is 24 months, your monthly instalments will be Rs. 25,000 (plus interest) but you will be making 24 payments to repay the SME loan.
When your SME loan application gets approved and sanctioned, you can work out the repayment period details with your lender before signing the contract.
You can pay your loan EMIs using cheques, bank transfers such as RTGS or NEFT, or through a UPI transaction such as Google Pay and Phone Pe. You can also opt for ECS to make the monthly payments. Electronic Clearing Service (ECS) is used nowadays by many lenders and it automatically debits your EMI payment from your account on the morning of the due date.
What happens if I can’t pay my SME loan EMIs on time?
If you have chosen to pay your EMIs through ECS, the transaction happens early in the morning on the day it is due. If, for whatever reason your EMI payment bounces, you are charged an ‘EMI Bounce Charge.’ After the first bounce, there is a second ECS pull after 3 days. If the payment bounces on the second ECS pull, you are charged the EMI bounce charge once again.
If you have chosen to pay your EMIs through another method like through cheque, account transfer, cards or UPI, you will still be charged with the ‘EMI Bounce Charge,’ if you fail to pay the EMI on the due date.
Generally, lenders allow a grace period of 1-3 days past the due date for you to pay the EMI. If you fail to pay the EMI after the grace period and your EMI payment bounces more than once, the lender begins to suspect that your business may be in a cash crunch. Your inability to repay your SME loan EMIs more than once may even cause the lender to suspect that you may be withholding the money intentionally. Your inability to pay your SME loan EMIs can also affect your chances of getting a business loan in future.
Every time your EMI payment bounces it is recorded in three documents – your bank statement, your loan account statement, and your credit bureau report. When you apply for an SME loan, the lender will evaluate your bank statement to determine your ability to repay the loan. Multiple EMI payment bounces may decrease your chances of getting loan approval from the lender.
How can I avoid an EMI payment bounce?
1. Set an automatic reminder of your EMI due date on your calendar
As a small business owner, you are busy and have a lot of stuff to keep track of. Despite this, your SME loan EMI due date is something you cannot risk forgetting. So, set a monthly automatic reminder to make the payment on time.
2. Track your bank account balance
Once you know you’re EMI payment is around the corner, make sure the account used to pay your EMI has enough amount money to pay the EMI. If you’re running low on funds in the account, transfer some money to the account to ensure you can pay the EMI in the first go.
3. Maintain a minimum bank account balance that is higher than your EMI dues
Maintain an average bank account balance higher than your EMI amount to avoid EMI bounces due to insufficient funds. This helps you avoid penalties from your bank since most Current Accounts have a minimum balance requirement and ensures your EMI automatic pull will not fail.
4. Communicate with your lender
If you find yourself in a situation where you may not be able to pay the EMI on time or if there is an unexpected issue preventing you from making the payment, let your lender know beforehand. Lenders appreciate honesty and may choose to mark the late payment as a technical issue if you have a good relationship with them. Communication can help you avoid the late payment being marked as an EMI bounce on your credit report. It also helps you build trust with your lender and shows that you are responsible for your finances.
When you apply for a business loan with CreditEnable, we share such useful insights with you to ensure you can maintain your creditworthiness with your lender and eventually become eligible for a larger loan amount in the future. Paying your loan EMIs on time helps you build your credit history and improves your relationship with your lender and may result in better loan terms the next time you apply for business financing.
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