Latest / Let's Talk Small Biz Finance with CIC Tucson / What Will Happen If I Can’t Afford My Business Loan Payments? | Coffee Chats with Caroline Nelson
Transcript
- Caroline Nelson: hi, and welcome to another episode of Let's Talk Small Biz Finance. My name is Caroline Nelson and I am joined today by Irasema Banuelos I am really excited to have you on the podcast today, Irisima. Irasema Banuelos: Thank you, Caroline. I'm excited to be here. Caroline Nelson: So we are here today to talk about what happens when you cannot pay your loan. here at CIC, we have a lending program. And so we work with businesses every single day. issuing their loans. Also, we work with them when they're not able to repay their loans. And so we wanted to dive into this subject. We know that sometimes when we can't make our payments, we don't have enough money to cover all of our bills. It can be very uncomfortable. It can be scary to call someone and say, hey, I can't make this payment. What happened? So we wanted to demystify the process a little bit, give you some information on what happens when you can't make your payment, maybe some tips for what you can do, how you can navigate it. and then also just a broader understanding of the process overall, what could happen and what some of the documents that you sign mean. because we're talking about like what happens when you can't make your payment, I just wanted to clarify like this is not legal advice. This is really for informational purposes only. So if you ever have a question, definitely would recommend consulting a lawyer, talking to your lender. but hopefully you find this conversation helpful today. So I want to start by talking about contracts. So a loan is a contract, very basic. just like the lease you sign for the space that your business is renting, or the document that you sign to buy a car, or when you buy supplies from a vendor. you're signing a contract. There's just different language in the contract, And what a contract is, it's just an agreement between two people. I promise to do X and you promise to do Y. And if I don't do X or you don't do Y, the contract spells out what could happen. I am the lender and you are borrowing money. And if you're not able to repay the money, then the loan document, the contract spells out what can happen. So we want to start by first breaking down some of the common documents that you're going to sign when you take out a business loan. would imagine many of us have taken out loans in our life and you sit down to sign the paperwork and they put all these documents in front of you and you're like, what does any of this mean? Right? We're all really excited. We just want the money. We want to move on with what we're doing, but we don't really understand what we're signing. So just want to talk through real quickly, high level, what these different documents mean so that you understand what you're agreeing to and how that could impact you in the future. So the first document is the promissory note. And this document it's just really a promise to pay. You are saying, you're acknowledging that the lender is letting you borrow money and it outlines the terms, the interest rate, how long you have to repay, your monthly payment amount, and you're saying Thank you for letting me borrow money. I promise to pay you back. So that's what a promissory note is. today we're gonna be mostly talking about business lending. That's what we do here at CIC is small business lending. some of these documents you may find in the personal space as well. Like all loans are gonna have a promissory note. but some of these, especially these next few, are gonna be more specific to business lending. So the next one is a security agreement. The security agreement lists what collateral you are using to secure this loan. collateral is assets that we put up to secure a loan. So if the business can't repay the loan, then those assets can be sold and used to repay the loan. So that's what collateral is. So on this security agreement, it will list whatever collateral you're offering. So commonly it's all business assets. that you own now and anything that you purchase in the future. That's like pretty blanket and standard. Sometimes the security agreement could be specific. Maybe you are using a specific piece of machinery as collateral. So the security agreement would list out what you're using as collateral. So keep that in mind when you're signing a security agreement. Make sure you understand. and verify that what you are using as collateral is properly listed in the security agreement. If it's all business assets, that's pretty blanket. But if it's a very specific item or items, you want to make sure that that is worded properly so that you don't accidentally offer more assets for collateral than you intended to. So the next document is a deed of trust. if you're using a property as collateral, so if you are using your personal home or a commercial property, then you'll be signing a deed of trust. And the deed of trust is what creates the lien on the property. Within the deed of trust, it explains what you're expected to do and also what happens if you cannot repay the loan. in these documents, both like in the security agreement and the deed of trust, it usually will state you need to keep insurance on the property, you need to maintain it. things along those lines. If it's something that can be kept in a garage, it should be kept in a garage and in working order, you need to maintain the value of it so that it can be used as collateral in the way that it was intended. and then the last one we'll talk about is a personal guarantee. So a personal guarantee is a document that we sign. So like the business owner, you would sign it saying, I promise to make the loan payments if my business cannot repay. So that's what a personal guarantee is. and if you're married, your spouse will typically need to sign a personal guarantee as well. So something to keep in mind, just because you're like if you decide to shut down your business or maybe it's not performing as you expected, if you have a personal guarantee in place, you personally are still responsible for paying this loan. In the business space, you almost always have to sign a personal guarantee, just a condition of the loan, but understand that trade-off if that's what you're signing. Lenders come in all different sizes. so keep that in mind too. CIC is a nonprofit. We are a small lender. So we have a limited amount of money to lend, and we need businesses to pay their loans back so that we can continue to support the next business. Unfortunately, we don't have a magic money machine, although I think some people do think we just make money in the back. It's absolutely not the case. So it's really important to us that our loans are repaid so that we can continue to do this work in our community and support others. All right, so now that we have talked about just some foundational documents and elements of a loan, we want to dive into some questions, probably why you are joining us today. so Irasema what should someone do if they realize they cannot make a payment? Irasema Banuelos: Well, Caroline, as soon as the business owner realizes that they're going to miss a payment and they know that they're having financial troubles, whether it's because a client is not going to pay them on time or they have maybe increased their expenses, then they should really contact their lender immediately. They shouldn't wait until they've had several mispayments. There will be likely more options if lender has a heads up. So they may be able to provide a temporary arrangement, like a payment reduction, or maybe pause the payments for a certain period of time. Caroline Nelson: That's really good to know. So what happens if they actually miss a payment? So maybe they've called and said, hey, I'm having difficulty making my payment, and then the date passes and they miss a payment. Irasema Banuelos: Typically when you miss a payment, the lender charges a late fee. Then they may call you or send you a letter letting you know that you missed a payment and that your loan is delinquent. Once you miss too many payments, then that's when the situation can become more serious. Your loan could go into default, and we're going to explain a little bit later what default means. it's at a point, where you're no longer in control of the situation. The lender is in control of the situation because of the contract that you signed when you took on this loan. Caroline Nelson: So what happens if the situation is more than a short term issue? if I realize I'm not gonna be able to make payments for the next six months or my cash flow has changed pretty dramatically? are there any options available? Irasema Banuelos: Yes, what the business owner can do is immediately contact the lender and request that they do a loan modification. Obviously, the lender is going to ask for a certain amount of documents to see if you qualify for that loan modification, that is definitely a long-term option for you. Caroline Nelson: And maybe it's probably worth mentioning as well. Every lender has different rules. And so this is why, it is important to contact the lender to understand what options you have for you. we're a community lender, we tell our clients if you communicate with us, like we can help you. But if you're not communicating with us, we're pretty limited. and so open communication is really important. But keep in mind that just because one lender offers something doesn't mean all lenders are gonna offer it. So next we want to talk about what happens if you can't make your payments at all. This is where things get more serious, and this is probably where we all get a little scared. our financial situation has changed. We know we can't make our payments. We took out a loan with good intentions, we really want to pay this back, but now what? we heard Irasema talk about default just a minute ago. in all Contracts, there is usually a default provision. So when we sign a contract, right, I promise to repay you lender. And if I don't repay you lender, this is what's going to happen. And that is the default section. If I don't make my loan payments, you lender can do X, Y, or Z. So you always want to look at your contract and understand what the default provisions are. When we are performing on our contracts as they're written. So when I'm making my loan payments on time, the lender cannot come and take my assets. They can't do anything because I'm performing on the contract as it's stated. If I stop performing on the contract as stated, if I stop making my loan payments, the lender can put my contract, my loan in default. And then all of a sudden I lose control of the future. the lender is now in control of what happens. And so we're going to take a few minutes and just talk about some of those what ifs. So Irasema, I'll let you start this one. Irasema Banuelos: Well, you are still responsible for the loan, even if you can't make the payments. So if your lender reports to credit, then it's going to be reported and it's going to affect your credit negatively. If you used assets to secure the loan, then those assets can be taken from you and sold. The process is not easy, but it can happen if you use an asset as collateral. When you sign a security agreement or a deed of trust, this is what you are authorizing the lender to do. If you signed a personal guarantee, the lender may come to you and ask you to repay the loan personally. If you do not, they could file a lawsuit against you. There's no set way that this process is resolved. There are a lot of pieces involved and how something moves depends on the situation. Contracts usually state that if there's a breach, someone not following through with their agreements basically, they are responsible for the cost of collection. This is true for loan documents. If you do not repay your loan and I have to hire a lawyer and take you to court, you are responsible for all those costs. And in the end, this loan costs you a lot more money than it would have if you had paid that loan on time. Caroline Nelson: I think that's a really important point. We've seen that happen a number of times. the collection process is not fun for anyone. I can tell you I did not get into the lending business because I want to be in the collection business. But unfortunately, we need our loans repaid so that we can continue supporting the community. So it's just a part of business is making sure that The money is owed to us as repaid. That goes for any business owner, right? When you sell a product, you need to be paid so you can continue to sell more products and buy more products. this is always a hard one. It's not pleasant for anyone involved, but it can end up being really expensive. And so I know in the beginning, sometimes it can feel like maybe they'll just go away, but it can end up being a really expensive in the end and just really stressful and and not fun. So, I know having these conversations is uncomfortable for both the lenders and the business owners. These are important conversations to have. When we have all the information and we know what we're working with, we can work together to find a solution. But if you are not picking up phone calls and you're not responding to letters and requests for information, it makes it hard for us to. navigate. And so we do have to take more of these traditional routes, filing a lawsuit or collecting collateral to repay the loan. if you have not been communicating with your lender, I would encourage you to pick up a phone and give them a call. There's no wrong time to start those conversations. So even if you have been avoiding them for a while, like they're not going to be mad because you decided to call them. They're probably going to be really grateful because you decided to call them because at the end of the day we do this work because We want to support small businesses. And so we want to find a way forward that works for everyone involved. And then one other note on this subject is secured debt versus unsecured debt. So secured debt is debt that is secured by something. So you have a loan that you have used collateral to secure, right? When you buy a car, that's a secured loan. You use your car to secure that loan. Unsecured debt is more like a credit card, right? If you don't pay your credit card, they're not going to come take your car. They're just going to report to credit and eventually charge it off. That doesn't mean you still don't owe them the money. It just means there's no collateral for them to come take. So if you find yourself in a situation where you are having to make choices about what to pay Keep in mind that your secure debt has much greater consequences than your unsecured debt. So I would prioritize making your payments based on security versus not security and like the most important things, right? Your house. We always want to make our house payments. We want to make our building payments, things like that, our car payments. And you can work your way through what's most important for you. so Irasema what advice do you have for businesses who are struggling to make their payments? Irasema Banuelos: I would say my biggest advice, Caroline, is for them to take a look at their business financials in order to try to identify the issues that might be contributing to the financial problems. It's important that they take a look at their cash flow and expenses to see if they can make any adjustments. If you cannot resolve this, that's okay. Then the next step would be to contact your lender as soon as possible and talk to them about any options that they may be able to offer. Sometimes they can offer to maybe defer the payments for a short period of time, or sometimes they can just maybe reduce the payments. Every lender is different like Caroline said before, but the most important thing is that you contact the lender and let them know that you're having problems making those payments. Caroline Nelson: Absolutely, those are such great points. it's really important that we know our finances. We want to know how much we're making and how much we're spending. And at the end of the day, how much is left? Are we spending more than we're making? Are we making more than we're spending? I know it takes a lot of work to keep track of our finances, but it is critical that we know our numbers and that we stay on top of our numbers. So definitely a really great suggestion. All right, so as we wrap up this podcast, we have a few parting thoughts for you. loan can be a valuable tool for growing your business, but it's important to understand the responsibility that comes with borrowing. Take the time to evaluate your business's needs, your ability to repay on a loan, and your overall financial goals. I think sometimes we think that money solves problems. And so, like if I take this loan. Life is gonna get better, or I'm gonna be able to make these payments because I'm gonna be doing something new, but that's not always the case. And so we wanna make sure that we've thought this through so that what we are intending actually happens. we are in an age of fast decisions and some lenders offer really quick turnarounds, possibly so fast that you don't have time to second guess your decision. right? We can get like loans online. Decision in hours, money in your account within 24 hours. I'm sure we've all seen those ads, places. but fast transactions often are more expensive. And so speed comes with the cost, but it also doesn't allow us the time that we need to think through our decision. So just something to keep in mind. occasionally we see some of these transactions come with. costs that you can't get out of. So if you take a quick loan all of a sudden and you decide you don't want it, you now still have to pay a lot more than you ever intended because you can't break the loan essentially. You can't pay it off early without a penalty. So unless you have an emergency situation and you absolutely need the money, I would recommend not taking on fast cash. Definitely give yourself time to think it through. And then last, just understand the contracts that you sign. Make sure you've read through the document. You know what everything means. Know what happens if you can't pay. If you're using assets to secure your loan, make sure you understand all of the provisions of that contract. You can always ask for a copy of any document that you sign ahead of time. And if someone isn't willing to give them to you, maybe that's a sign that they're not the right fit for you. Read your documents, ask questions, make sure that you are comfortable with what you are signing on for. Irasema do you have any other parting thoughts? Irasema Banuelos: In the end, it's contact the lender and communicate to them the financial troubles that you're having. Because if they don't hear from you, they will never know what's going on and they will not be able to help you. So it's extremely important that you contact them. Caroline Nelson: Alright well, Irasema thank you so much for joining me today. It was really a pleasure to have you and to talk about what happens when someone can't pay their loan. This is a really heavy subject. I know it sounds a bit like a little doomsday when we talk about this, but I think it's also really important Just make sure that when we are entering in transactions, we are being thoughtful in doing so to really set ourselves up for success in the future. So thank you so much to everyone for joining us today. we will see you very soon for another episode of Let's Talk Small Biz Finance.