7 Things Small Business Owners Should Know About Loan Servicing
May 24, 2019 | Last Updated on: July 18, 2022
May 24, 2019 | Last Updated on: July 18, 2022
Loan servicing is what happens after you have been given a loan. Small business owners who get a business loan online can rest assured that the repayment process is likely to be just as seamless and automated as the application process. Lenders are perfecting their portals and dashboards to make the servicing process as streamlined and user-friendly as possible. With online lenders making the loan application process so fast and easy, there’s never been a better time to apply for small business financing. Accessible small business loan products can be the difference between a company that’s thriving and growing and one that’s struggling to make ends meet.
Loan servicing is the management of a loan during the repayment process — that is, from the time when the money is handed out until the last penny has been repaid. This involves tracking repayment of principal and interest, negotiating changes to payment plans, assessing late fees, and communicating with borrowers who owe payments.
Oftentimes the lender does not service the loan. This is particularly true with traditional bank loans, lines of credit, SBA loans, and with certain types of loans, especially real estate mortgages. Servicers make money by getting a small cut of each loan payment. Servicing business loans may or may not be performed by the lending institution; you should find out when you sign your contract.
The process of servicing an online business loan varies, depending on the lender and the terms of the particular loan product. You may be asked to send in payments monthly, weekly, biweekly, or daily. Payments can often be made automatically by connecting your bank account to the lender’s system.
At Biz2Credit, the repayment terms depend on the parameters of the loan. Conventional products (for example, a line of credit) come with monthly payment options. Other products such as merchant cash advances can draw repayment daily, weekly, or biweekly, from your future credit card receipts.
Once you have received your online loan, the clock starts on repayment. You will receive a billing statement that says how much you owe, the due date, and methods of repayment. You may opt to receive paper bills, though many systems now recommend paperless billing. Online lenders, particularly, may expect you to manage your payments entirely online.
Once you’ve paid the principal by the due date you’ll receive the next bill, and so on, at the agreed-upon interval until you’ve paid the loan and interest back.
It’s likely that the loan servicing process for a loan from an online lender will take place — surprise! — online. The company that provided you the loan is typically the same entity that will service your loan; you can continue to work with the same team who shepherded you through the application process.
However, a Biz2Credit study found that small businesses often use checks to pay their bills, especially within certain industries. In the construction industry, for instance, 47% of companies use checks instead of online payment options.
“Banks seeking to lower check processing costs and to cut check fraud for their SMB customers should investigate alternative electronic payment technologies that can provide these and other benefits,” says Biz2Credit CEO Rohit Arora.
Servicers have an interest in borrowers staying on track to repay their loans successfully. They expect you to pay fully and on time, and will levy late fees and other charges if you don’t. However, if you can’t meet the repayment terms or otherwise have trouble paying what you should when you should, it’s best to reach out to the lender to discuss your options.
You may be able to switch to an alternate repayment schedule on your term loan that will better match your cash flow. It may be possible to lengthen the loan term — paying it back over a longer period of time — which will lower your monthly payments but increase the amount of interest overall.
The thing you shouldn’t do if you are in danger of not being able to make your payments is to clam up and ignore the problem. Discussing the issue with your lender to find a solution that will allow you to continue paying down your loan is the best way to make sure your problems don’t balloon into something truly unmanageable.
During the servicing phase of the borrowing process, business owners might feel like they are stuck with the amount of money they borrowed even if they actually end up needing more for business needs. They may kick themselves for not taking out a bigger loan or start scrambling around wildly to increase sales and boost income to obtain the capital they need.
But in many cases, it is possible to borrow more working capital even when one loan is being serviced. One option is to take out a second loan with a different institution. However, a lender who sees that you’ve just taken out a loan will have questions about your money management and financial situation that may make them balk at lending to you.
Additionally, having outstanding loans increases your debt-to-income ratio, a key metric in your credit score that lenders use to determine whether to lend to you. This number can scuttle your chances of taking out more money while you’re in the midst of repaying a loan.
That being said, some lenders, such as Biz2Credit, have flexible policies that may allow lenders to take out additional business financing during the repayment period. Just because your loan is being serviced doesn’t mean you have to be frozen in time, waiting until the last dollar is repaid before you can expand in new directions.
The servicing process for business loans is typically very straightforward, especially for online business loans that can be managed digitally. Business owners can even have automatic payments set up to prevent forgetting a payment.
Business owners who are willing to move away from writing paper checks will find that loan options have never been simpler or more user-friendly. Online lenders in particular are focused on the customer experience, striving to make business lending as fast and easy as it can be so you can concentrate on running your business, not worrying about capital.