Your cheque bounced, and you weren’t able to make a payment when you said you would. It’s ok. Almost all of us have found ourselves in a similar situation. The bounce could have been for several reasons – you were moving money from one account to another but there was a technical delay, your signature on the cheque did not match the one on file, the date on the cheque was wrong, your moved money to the wrong account, or your bank balance was too low to clear the cheque at the time.
An exceptional bounce does not have a severe impact on your business loan prospects. Instead, your financial behaviour after the bounce and what kind of payment the cheque bounced on impact your business loan prospects. Let’s talk about these.
What happens if my cheque bounces?
If the bounced cheque is a one-off event, it is called an exceptional bounce.
Alternatively, if the cheques you cut bounce often, this is called regular bouncing.
If your cheque bounces, you’re charged a penalty, called a bounce fee. This fee is deducted from the bank account the cheque was for, and this transaction gets recorded on your bank account statement.
When your cheque bounces, we recommend you clear the payment via other mediums, like an RTGS or NEFT payment, bank transfer from the same or another bank account, or another cheque within 1-2 days of the bounce.
When you apply for a small business loan, all lenders review your bank account statements as a part of the loan assessment process. If a cheque bounce and penalty get recorded on your account statement, and then the same amount is charged via a different payment method within 1-2 days, lenders understand that the cheque bounce could have been due to a technical issue or unintentional mismanagement of funds. Your ability to honour the payment within a short period conveys to the lenders that you were not wilfully withholding the payment and that your business isn’t in a cash crunch.
Learn how to write a cheque correctly to avoid rejections by your banker.
My cheques bounce regularly. What impact does that have on my business loan prospects?
If your cheques bounce regularly, and you don’t clear the bounced amount via other modes of payment within 1-2 days, it conveys to the lender that your business may be in a cash crunch.
We’ve already mentioned that if your cheque bounces, you’re charged a penalty. Both these transactions are recorded on your bank statements for the lenders to see when you apply for a small business loan. But when your cheques keep bouncing, and you’re charged the fee multiple times, it has two impacts:
- You’re losing cash every time your account is charged a bounce fee. This is a charge you could have avoided.
- Frequent bounces on your bank account statement convey to a lender that your business may be in a cash crunch, which reduces your creditworthiness with them. The bounces tell them you may not run your business responsibly, making you a risky borrower for them, negatively impacting your business loan prospects.
As credit specialists, CreditEnable recommends your cheque bounces should not exceed 1% of your transactions for the month.
When does a cheque bounce impact my business loan prospects?
If your lender does not offer an Electronic Clearing Service (ECS), which automatically withdraws your EMI from your account on the day your EMI is due, then you can use a cheque to pay your EMI instalment.
If the cheque made out to your lender to pay your EMI instalment bounces, and you don’t clear the EMI payment within 1-2 days of the due date, then it begins to impact your creditworthiness. This cheque bounce gets recorded on the following statements:
- Your bank account statement
- Your loan account statement
- Your bureau/credit report
If it was an exceptional cheque bounce and you pay your EMI within 2 days of the due date using any other means (bank transfer, another cheque, RTGS/NEFT, etc), lenders will attribute the bounce up to a technical issue or simple mismanagement of funds and forgive it.
However, if you’re unable to clear your dues within the 2-day grace period, it conveys to the lender that you may be intentionally withholding the money or that your business may be in a cash crunch. Both reasons impact your creditworthiness with lenders because they increase the risk involved in lending to you. Lenders are traditionally risk-averse, and though your financial history is just one factor in their risk assessment, your history with money does have a considerable impact on their lending decision. A lender may be willing to lend to you, but because of the risk involved, they may offer you a lower loan amount, a shorter repayment period, or a higher interest rate to ensure they can recover their money.
Learn how to avoid defaulting on a small business loan.
Conclusion
An exceptional cheque bounce is not something to lose sleep over. However, if your cheques are regularly bouncing and you’re worried that your EMI cheque may bounce as well, contact your lender before the EMI is due and explain your financial situation to them. They may be willing to work with you to design a plan that improves your finances and helps you pay your EMI dues on time.
When we help our SME customers get small business finance, we assess your business and financial history to ensure you’re not trying to take on a loan that your business cannot afford right now. To qualify for small business financing with one of CreditEnable’s lender partners, you need to maintain a good average bank account balance, have an Experian credit score of 750 or above, and have no recent history of loan defaults.
Find out the consequences of defaulting on a small business loan.