Sometimes, a business owner may take out a business loan and find themselves struggling to repay the loan on time. This could be due to ill preparation, but it also could be a symptom of outside factors (natural disasters, the economy declining, expensive equipment becoming defective, etc.).
When business owners struggle to pay off their loans, one of the first things many ask is whether they can use their credit card to fulfill their business loan obligations while “putting off” the actual payment.
In this post, we’ll discuss this method of repaying a loan (and the pitfalls that come with it) and give some alternative ideas that you should keep in mind if you ever find yourself struggling to make loan payments.
What Happens if You Don’t Repay a Loan?
If you are unable to repay your loan to the agreed terms, there will be some negative consequences to you and your business:
Decreasing Credit Score
One of the biggest factors in business credit scores is the ability to pay loans on time. If you do not, your business credit score will take a big hit. This could make you less likely to be approved for loans or leases in the future.
Loss of Collateral
Many business loans require the business to provide some sort of collateral in the case that they cannot pay the loan. This is anything that can be liquidated quickly, whether that be bonds or a company vehicle/location.
The collateral will be collected if you fail to repay the loan.
U.S. Treasury Involvement
In some cases, the U.S. Treasury Department will get involved. In these cases, your bank accounts, wages, and tax refunds may be garnished (money withheld from them and paid pack into the loan) until the business loan is fully repaid.
Obviously, it is important to pay back your loans and avoid all of the above, which is why it is a good idea to be aware of your options.
Repaying a Business Loan With A Credit Card
Now that we’ve discussed the importance of paying off your loan, we’ll discuss paying off a loan with a credit card.
The idea is that you can shift the business loan to your business (or personal) credit card. This will help you make your payments on time and delay the actual payment of the debt to a later date by putting it on your credit card.
Keep in mind that not every lender will allow you to do this. Even if they do allow it, there are several reasons why this might be a bad idea:
It Doesn’t Eliminate Debt
The reality is that you aren’t actually paying off any debt, you are just shifting debt to a different source (the credit card). In most cases, this means that you will lose money as you are still going to pay interest on the debt you have.
It’s also very likely that if you are struggling to pay back the business loan, you very well may start having trouble paying back bigger payments on the credit card as well.
Most banks or lenders will have a transfer fee associated with paying a loan with a credit card. This can be anywhere from 1% to 5% of the transferred amount. This can add up and cost you quite a bit.
Interest rates for credit cards are almost always higher than that of a business loan. This means that you will almost always end up being more in debt by paying off loans with a credit card, and your business will likely end up losing a lot of money down the road.
First Alternative: Debt Consolidation Loan
As we’ve been implying throughout the post, there are better ways to pay off loans than using your credit card. One of the best options is the use of a debt consolidation loan.
This means that you will take out one new loan that will pay for all of your current outstanding debts.
Applying for a debt consolidation loan is pretty straight forward. First, you need to calculate how much you owe on all of your current outstanding loans. Next, research different lenders and debt consolidation loan programs to find the best one for your business.
Ideally, you would find a lender that would charge you a lower interest rate than you have on your current loans, saving you money in the process.
A debt consolidation loan has numerous advantages over other loan repayment options (like using a credit card):
If you have more than one outstanding loan at a time, you will have to make multiple monthly payments to different lenders. In most cases, you can automate these payments so you don’t have to keep track of who you need to pay when, but even still it can be a hassle juggling multiple loans at one time.
A debt consolidation loan only requires one monthly payment, making it much easier for you to track.
If you do your diligence and research available options, you can usually find a lender that will offer you a debt consolidation loan at a much lower interest rate. This allows you to save money you would spend on the previous interest rates (or the higher interest rates you would pay if paying off a loan with a credit card).
Changing payment terms
A debt consolidation loan allows you to change payment terms from previous loans. The most common example is to change to a longer payment term so that you make lower monthly payments, making the loan much more manageable.
You could also choose to make weekly payments or payments twice a month, depending on what is most convenient for you.
Learn if you can use a business loan as a debt consolidation loan.
Second Alternative: Contacting Your Lender
If you really cannot repay a loan, you need to contact your lender well in advance to let them know of your circumstances and why you will not be able to make your normal payments.
While the lender technically does not have to help, many will work with you to prevent you from defaulting on the loan.
They may set up a partial payment so you can defer the brunt of the cost to a later date. They may also change your payment schedule or payment term so that you are making lower payments for a longer period of time (i.e payment term of 5 years changed to 10 years).
While this is not guaranteed to help you, it is still often a good option for those who know they are going to start being unable to make loan payments.
Instead of deferring the loan to another account (and dealing with transfer fees and higher interest) you can renegotiate the current payment terms to make them more manageable.
This is better for you to prevent the consequences of defaulting on a loan mentioned above. And if you had been paying on time and in full previously, your lender is more likely to change the payment terms, since they will likely lose money as well if you default as opposed to paying over a longer period.
Repay Your Business Loans to Stay Out of Trouble
We hope that you’ve learned more about some of the options you have when you run into trouble paying your loan. We hope that you never have to find yourself in this situation, but if you do you can use these alternatives to help you out of a bind.
At Camino Financial, we always strive to fulfill our motto: “No Business Left Behind”, and a big part of that is creating a community of small business owners and giving back through our offerings of small business loans and loan financing education.