Tips to Avoid Defaulting on Your Business Loan

Funds are the lifeline of any business and all requirements are not met by profits or reserves. Generally, businesses avail of finance from lenders, which may be for a long or short term, and secured or unsecured.

These loans may be used to meet the working capital requirements or fund capital expenses. These are often known as business loans and are disbursed after lenders assess several factors. Businesses that have an excellent track record, such as high and consistent profits and regular repayments to creditors are usually eligible for higher loan amounts at lower interest rates.

Even if your business performance has been good in the past, sometimes, due to a miscalculation, declining sales, an untoward incident, or a natural calamity, you might face difficulties to repay the loan on time.

If you are late in repaying an installment, then it would only attract a few charges. This is also known as delinquency, as long as it only occasional and the delay are very short. If the frequency increases and the delays get longer, your loan will be termed as default, and this is bad for the creditworthiness of your business.

Implications of default

It depends on the lender as to how long they will wait before they classify your loan as a default. To recover their money, lenders may choose one or more of the following options.

  1. Collection agency

Your lender may choose to send the details of your business loan to the collections agencies that specialize in recovering money from defaulters. This is not good for your credit history and you must avoid the same.

2. Report to credit rating agencies

The records for all types of credit facilities including business loans in India are maintained by Credit Information Bureau (India) Limited (CIBIL). Therefore, if you delay the repayment of a particular installment or are classified as a defaulter, it will be informed to the credit rating agency. As a result, your credit score is negatively impacted. A lower credit score may increase the interest rates on all the future borrowings.

3. Seizure of collateral

In case you have mortgaged any asset, such as equipment, the lender will liquidate or take possession of it to recover the money. The appointed collection agency that has taken over the loan from the lender may also seize your asset to recover the dues.

4. Lawsuit

In cases of unsecured loans wherein no collateral is pledged, a lawsuit is unavoidable.

In order to avoid all such problems, you could take the following tips.

5. Restructure the loan

You should always call the lender at the earliest and explain the situation to them. Once convinced, they could be willing to temporarily reduce payments, or work out a better repayment schedule.

6. Refinance

Although not very economical, you could choose to get a bigger loan for a longer duration so that you are able to repay the current outstanding and reduce the installment. Debt consolidation has its pros and cons and you must evaluate all these before choosing this option.

7. Reduce costs

You may want to grow your business quickly. However, this is not easy and, therefore, reducing the costs to meet your current cash flow needs is recommended.

A lender’s first priority is to recover their money back. Financial institutions offer competitive business loan interest rates to help grow your business. However, if you are unable to repay on time, lenders are willing to relook at the loan and structure it to help you out.

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