Funds are the lifeline of any business, and profits or reserves do not meet all requirements. Generally, businesses avail themselves of finance from lenders, which may be for a long or short term, and are secured or unsecured.
These loans may be used to meet the working capital requirements or fund capital expenses. These are often business loans and are disbursed after lenders assess several factors. Businesses with 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 repaying the loan on time.
If you are late repaying an installment, it would only attract a few charges. This is also known as delinquency, as long as it is only occasional and the delay is very short. If the frequency increases and the delays get longer, your loan will be termed as default, which is bad for your business’s creditworthiness.
Implications of default
The lender decides how long to wait before classifying your loan as a default. Lenders may choose one or more of the following options to recover their money.
Your lender may 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 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 future borrowings.
3. Seizure of collateral
If 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.
To avoid all such problems, you could take the following tips.
5. Restructure the loan
You should always call the lender as soon as possible and explain the situation to them. Once convinced, they may be willing to reduce payments or work out a better repayment schedule temporarily.
6. Refinance
Although not very economical, you could get a bigger loan for a longer duration to repay the current outstanding and reduce the installment. Debt consolidation has pros and cons, and you must evaluate them before choosing this option.
7. Reduce costs
You may want to grow your business quickly. However, this is not easy, so reducing costs to meet your current cash flow needs is recommended.
A lender’s priority is to recover their money back. Financial institutions offer competitive business loan interest rates to help grow your business. However, if you cannot repay on time, lenders will review the loan and structure it to help you.
