Business owners should avoid defaulting on a business loan as much as possible, especially since one must have a realistic payment plan in mind when securing project funding. However, extraordinary circumstances can derail even the most prepared small and medium enterprise (SME). In these cases, you may not have any choice but delay payments or go into business loan default.
Applications for business loans in the Philippines have skyrocketed during the pandemic – and so has missed payments and defaults. In connection, the government has also received an increased number of complaints for debt collection harassment. From 485 complaints in May 2019, the National Privacy Commission (NPC) handled 1,867 complaints in December 2020, an increase of over 200%.
First, know that no one gets imprisoned for non-payment of a business loan in the Philippines, as per the 1987 Philippine Constitution.
If you miss a payment, legitimate lenders will first contact you with payment reminders, and impose late payment penalties. If the payment delay goes on for the next three billing cycles, your lender will then declare the business loan as “delinquent” or “in default”. It usually means you have to pay the full business loan balance immediately – including the total interest amount, penalties, and other charges.
The lender will also report your case to the Credit Information Corporation (CIC), the central registry of borrowers’ credit information and history. The report can damage your credit history and make future business loan applications more difficult and expensive.
If your loan is unsecured, the lender will turn it over to a debt collection agency. These agencies will contact you more aggressively via call, text, or even mail to get repayments. If your loan is secured, your lender will simply inform you once your business loan is in default, and begin the process of seizing your provided collateral.
The worst-case scenario is the lender can file a civil case against you for non-repayment of a business loan in the Philippines. If the lender wins, the court will demand you pay the full business loan balance, interest, and penalties to the lender – plus legal damages.
The Security and Exchange Commission (SEC) counts the following as unfair debt collection practices punishable by law:
Take note, however, of the following exceptions that allow disclosure of your information:
First, do not give debt collectors permission to disclose or publish your personal information anywhere – if you can state this in a recorded call or written statement, the better. Then, record every instance where a debt collector behaved out of bounds via text, email, call logs, or video.
You can file a report with the NBI’s Cybercrime Division, the PNP’s Anti-Cybercrime Group, the NPC, or the SEC. These government agencies will review your collected evidence and coordinate actions with other agencies to enforce relevant punishments.
For instance, accessing your contact list without authority is a violation of the Cybercrime Prevention Act, punishable by up to 12 years in jail and fines of at least ₱200,000. Malicious disclosure of your personal information is punishable by up to 5 years’ imprisonment and up to ₱1 million in fines. The SEC also imposes separate fines to lending companies found guilty of unfair debt collection practices.
Be proactive by reaching out to your lender and negotiating. Request for loan rescheduling, where the lender extends your loan term to reduce your monthly or quarterly payments; or loan restructuring, where the lender changes the type or repayment scheme of your business loan. The latter can reduce your current interest payments, put a larger gap between your billing cycles, or modify the frequency of your interest payments. Note that you may end up with a higher final loan cost for both options.
Lastly, ask if any of your loan fees can be waived or reduced, and if a grace period is possible. If you are a good payer and show sincerity in fulfilling your obligations, your lender may be more willing to adjust. Legitimate private lenders are also more likely to adjust due to less stringent internal protocols; some even proactively prevent clients from going into default. For instance, First Circle, a fintech firm financing growing SMEs since 2016, freezes their clients’ credit line if they are borrowing too often or beyond their means. This protects their clients from putting their businesses at risk. First Circle also assigns a dedicated account manager to each client. In case of repayment issues, the account manager can then recommend tailor-fit, in-depth solutions.
Another option is debt refinancing: taking out another business loan to pay off your current loan. While this can be good for stable businesses, you will be taking on even more risk if your business is already in danger of missing payments. If this is your only recourse, find another business loan with better rates or longer terms than your current one. You may also incur early payment charges for paying off your initial business loan. For these reasons, debt refinancing isn’t for every business.
Business loan defaults can happen even to the best entrepreneurs, as there will always be financial circumstances out of your control. It shouldn’t define your business – or your skills as a business owner. It is also not a cause for shaming, threats, and other forms of harassment from lenders and debt collectors. So know your rights, understand what behavior is out of bounds, and lodge a complaint once you have adequate documentation of debt collection harassment.
