What to Know About Default Loan for SME

There are numerous reasons why entrepreneurs would apply for a loan for SME. It might be because you want to take full advantage of a business opportunity that rarely happens, and you need to take that chance.

You might also need emergency funds to save you from a potential cash flow issue. It is also possible that your business plans require you to upgrade your systems now before technology or competitors disruptions take over.

You Got A Loan. What Now?

Qualifying for a loan for SME in Singapore is not an easy feat due to strict credit criteria. Don’t rest on your laurels now that you’ve secured bank financing approval. This is not the end of the challenge. In fact, you’re facing another hurdle – paying back the loan.

You may have received a business term loan, and your loan installments are safely spread over a couple of years. Smaller installments are, of course, easier to pay. Still, you are indebted, and you should pay both the principal and the interest vigilantly until the end of the term. In contrast to equity financing, debt financing means that the owner of the business must be liable for financing.

You know, running an enterprise is like sailing the seas. You get into a storm sometimes, and you have to be prepared for a rough ride at sea. Every day, there are “storms” that could pose a challenge.

For example, when a major customer fails to pay you on time, it affects the timing of cash inflows to your business. Massive increases in import taxes on materials that you use for a major product affect your costs. Sales can be influenced by a larger competitor located across your establishment.

Missing A Payment and Penalties

Daily “storms” could influence your otherwise healthy cash flow position and lead you to miss out on some monthly payments. Missing payments could lead to a penalty charge. The late payment penalty is sometimes related to loan charges and fees that most SME owners fail to pay.

Different financial institutions and banks have different ways to categorize a default loan event. Your loan agreement specifies the conditions or acts that constitute default. While different creditors may have slightly distinct approaches to classifying a default event (at first instance or after a series of defaults), it’s certain that they all charge fines for non-payment.

In particular, most banks would classify a borrower who has been paid for 90 days or more as a severe default event.

 What Creditors Do When You’re In Default

Your creditor will give you notice once you have defaulted (based on the provisions of the loan contract). The first notice will probably be a brief reminder that you have been remitted to your payments and urged you to settle your past fees, including late payment charges.

The second and subsequent notices will most likely be the same, but with a strong directive to settle your responsibilities, probably a reminder of the consequences of default and potential lawsuits against you if you still fail to make payments.

When’s the Right Time to Discuss the Problem?

Talk to your loan officer right now. Do not wait for the notices to come to you. Don’t let late payment charges and interest accrue. Addressing an issue upfront reflects that you are a proactive and responsible borrower.

Discuss your problems with the loan officer of your bank. He/she will discuss with you an action plan that could bring your loan account back to “current” status.

Alternatives may include restructuring your loan, but be prepared to pay a significant part of your past obligation before you could recommend any restructuring and recalculation of your account.

Defaults Put a Dent on Your Credit Rating

The effect of default is not only on the burden of having to pay for penalties. It affects your personal credit rating as well. There are agencies such as the Credit Bureau (Singapore) Pte Ltd, which maintain and publish information on the credit profile of the borrower, in particular the ability of the individual to pay and the occurrence of loan default. They designate a credit rating for all borrowers.

Once you default, your credit rating will have an impact, and this will further impact your chances of getting a loan in the future.

Lender’s Rights in the Event of Default

One of the lender’s alternatives, in this case, is to foreclose an asset that you have mortgaged or assigned as loan security. So if your loan is protected by real estate, equipment/machinery, bank account, or accounts receivable, expect your lender to recover the default amount (including interest and penalties) through those mortgaged assets that are common in asset-based lending.

The security papers, as well as the loan contract that you have signed, contain clauses on what to do in the incident of default and foreclosure.

For instance, if your loan is secured by a real estate mortgage, the lender has the right to foreclose the property. Eventually, the lender will give away the property to recover the outstanding amount of the loan. Excess cash from the sale shall be paid to the borrower, given there are no other links to the property.

What happens if your loan is unsecured? An unsecured SME loan is usually backed by your personal assurance. Depending on the type of personal assurance imposed by the bank (usually the ‘all monies guarantee’), the bank may have the right to claim all of your personal assets in order to discharge your outstanding loan.

What is the Consequence of A Personal Guarantee on a Business Loan?

A personal guarantee does not create a link to a specific asset that is owned by a company. Instead, it enables the creditor to take over any of your personal assets. The creditor will claim every asset you own until the balance you owed has been fully recovered.

Usually, there are two types of personal guarantees. If you opted for an unlimited personal guarantee in favor of your lender, the lender could fully recover the debt in question, including related expenses, by taking over the assets you have.

As a result, the creditor claims after your retirement fund, your home, car, and even your children’s education fund until the balance (and related costs) have been settled.

On the other hand, a limited personal guarantee suggests that the borrower can claim up to the amount you both agreed on in the guarantee documents after your assets. There is a cap or a ceiling on a number of assets that they can claim.

Most banks will involve key directors or major shareholders to provide a personal guarantee with a liability capped at the principal balance of the unsecured business loan extended.