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Updated: March 27th, 2020
If you’re hoping to expand your small business into a new location, purchase an essential piece of equipment or raise working capital to help cover your seasonal budget, a small business loan can be the answer. When you apply for a term loan with Funding Circle, for example, we’ll take a look at your credit history and score to get an idea of how financially responsible you are. While perfect credit isn’t a requirement for a small business loan, having a past due debt on your file could be an obstacle to an approval.
If you’re gearing up to apply for financing, take a look at this quick guide which breaks down past due debt and how to handle it.
To put it simply, a debt becomes past due when the payment date comes and goes but you haven’t paid. The past due balance is the amount that was owed by the original due date. Depending on the type of debt involved, this could be part of the balance or all of it.
For example, let’s say you have a small business rewards credit card that you use to purchase office supplies. You owe a balance of $5,000, with a minimum payment due of $100. Your due date is the 20th, but you slip up and forget to pay before the next billing closing statement. When your new statement is issued, your minimum payment will include the past due balance of $100, along with any late fees the credit card company charges according to your contract.
With something like a vendor account, the entire invoice may be considered past due if you don’t pay up by the due date. It’s up to the individual vendor to determine whether to charge late fees, interest or other penalties on past due invoices. Despite relationship-based payment terms where vendors may forgive payments past the arranged due date, the late payments still will affect your score negatively in most cases (as credit bureaus cannot account for varied changes in terms).
The impact that a past due debt can have on your credit depends on how far behind on the payment you are. If you’re two or three days late paying your credit card bill, for example, there’s no real damage done, other than incurring a late fee. Once you become 30 days past due, however, your creditor can report your account to the credit bureaus.
Credit bureaus collect information about your various credit and loan accounts, including payment history, which is then used to calculate your credit score. Both your personal and business credit score incorporate payment data, although the way that information is used will vary.
A personal FICO score, for example, is based on payment history as well as other factors and it’s designed to paint a broad picture of your financial habits. PAYDEX scores, on the other hand, which are business credit scores issued by Dun & Bradstreet, are primarily an indicator of how likely you are to pay your financial obligations on time.
In either case, a poor payment history can result in a lower score, which could make obtaining small business financing more difficult. The damage to your credit can be compounded if a past due debt is sent to collections or charged-off altogether.
If you have a past due debt lingering on your personal or business credit file, doing nothing isn’t an option when getting a loan is the goal. There are several different options for dealing with a past due account.
One important thing to keep in mind is that negative payment history, including past due debts, can remain on your personal credit report for seven years. Making a simple change such as setting up automatic payments for each of your bills can help you avoid late payments so that when you’re ready to apply for a small business loan, you’re putting your best foot forward from a credit perspective.
Louis DeNicola is the president of LD Money Media LLC and an experienced finance writer who specializes in credit, personal finance, and small business finance. Within the small business sphere, he helps business owners understand their financing options, cash flow management, business credit, and taxes. In addition to Funding Circle, you can find his work on BlueVine, Credit Karma, Experian, Wirecutter, and Lending Tree.