When you take out a business loan or buy an item that you wish to pay for later, you can opt for the EMI payment option which allows you to pay for it in instalments over a set period. EMIs are the most common method of loan repayment and are also used as the primary mode of payment for high-priced items. If you are an SME looking for a business loan or are in the middle of repaying a business loan, then you must be familiar with EMIs. Your EMI repayment history has a significant impact on your chances of getting a business loan in the future and your creditworthiness. Let us find out how and why you should avoid bounces of your business loan EMIs.
What is an EMI?
Equated Monthly Installment, commonly known as EMI, is a method of transaction in which the lender sets a fixed period for borrowers to pay back a loan plus the interest they are charging on the loan amount. So, the EMI you pay every month is a portion of the principal amount you borrowed, and the interest being charged by the lender for the loan. Once your loan amount is determined, your lender determines a schedule for you to repay the loan each month for a set repayment period.
When you apply for a business loan, the repayment period depends on the loan amount you need, the type of business loan you apply for, and your ability to repay the loan within the set period.
The number of EMI payments you make to repay a loan depends on the duration of your repayment period.
What happens if I fail to pay my business loan EMI on time?
Nowadays, most lenders have automated the loan repayment procedure using ECS. Electronic Clearing Service (ECS) automatically debits your EMI amount due on the date it is due from your bank account. The ECS pull happens early in the morning on the due date. To discourage late payments lenders charge an ‘EMI Bounce Charge’ in case someone’s automated EMI payment fails or they are unable to make the payment on time. The amount of this charge varies depending on the lender.
You can also opt to pay your EMI through other methods such as cheques, RTGS, NEFT, Debit or UPI.
If you have opted to repay your loan through ECS pull, you will be charged the EMI bounce charge as soon as the ECS pull fails. If your automated payment fails, you can try to pay your EMI through another method as lenders usually give borrowers a 1-3 day grace period to pay the EMI without facing any consequences.
If you are still not able to repay your EMI at the end of the grace period, it is reflected on your credit report. If you are late on your EMI payment once, lenders are understanding. If you’re late on your EMI payments 3 times or more lenders begin to think your business is in a cash crunch.
How does a business loan EMI bounce impact my chances of getting an SME loan in the future?
Each EMI bounce charge and cheque bounce penalty is recorded in your bank statement. When you apply for an SME loan, lenders review your bank statement for the past 12 months. Since the penalties and charges mentioned in the bank statement are evident to your lender, they can impact their decision to lend you.
A one-off business loan EMI bounce is not an issue. It can happen to anyone for several reasons, some of which may even be out of your control.
If you pay the business loan EMI within 1-3 days of the EMI bounce, some lenders may choose to mark it as a technical error since you were able to make the payment within the grace period. However, a longer delay may lead them to question your ability to repay the loan and your creditworthiness.
Keeping up with your business loan EMI obligations builds and improves your credit score, improves your creditworthiness and may make you eligible for a larger SME loan in the future.
When you apply for an SME loan using CreditEnable’s free service, we ask eligible SMEs to share their supporting documents, including your bank statements for the past 12-months, before sending your complete file to one of our lender partners. If you have a good enough credit score and you have no EMI payment delays on your report, we can help you get the business loan you need to grow. If there are EMI payment delays recorded on your credit report, we’ll work with you to understand why and help you find the right business loan based on your finances and growth needs.
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