Foreclosing Business Loan

Foreclosing Your Small Business Loan? Know This First

July 28, 2022 • 4840 views
Author: PoonawallaFincorp Category: Business Loan

Getting a small Business Loan is very common now these days. With online finance partners like Poonawalla Fincorp, fast Business Loans are within reach of every SME. Small businesses can apply for a Business Loan to meet their various business goals - to increase working capital, to buy new equipment/machinery, to hire new employees, to upgrade technology or just to meet a sudden surge in demand. While banks rarely offer small Business Loans without collateral, NBFCs and other such financial institutions offer unsecured loans (also known as unsecured Business Loans). They offer a simple online process with basic eligibility criteria and minimal documentation.
However, the repayment tenure of these Business Loans varies from one lender to another. Many small businesses may choose to repay the loan before the repayment tenure, whenever they have surplus cash flow. This is called 'foreclosure'. 

This can be done either by making a partial payment for the outstanding payment or by making full payment for the outstanding amount before the loan maturity. Many businesses usually opt for foreclosure of Business Loan to save on interest expenses.  However, before choosing a foreclosure, the small business needs to consider some of the following points because pre-closure may not be the best option in every case. 

But first, we will discuss what does Loan Foreclosure mean?

The borrower may choose to repay the entire loan amount at once before the actual due date and thus become financially debt-free instead of paying regular EMI for a long period. 
Thus, the full repayment of the outstanding loan amount in a single payment before the scheduled equal monthly instalment (EMI) period is known as loan foreclosure. For loan foreclosure, the borrower has the option to choose the number of equal monthly instalments (EMIs) to be paid as well as the month in which the borrower wants to foreclose the remaining loan amount. This pre-planned loan will help calculate the amount of the mortgage. 

Important things to remember when you choose to foreclose a loan

1. Foreclosure fee
Foreclosing your small Business Loan leads to a loss of interest for the lending institution, which is their income from the loan. To discourage small businesses from foreclosure, lenders may charge  prepayment penalties and foreclosure charges. These penalties negates the savings made on the interest charge in case of part-payment or foreclosure. 
If you intend to close a small Business Loan, make sure you read its the terms and conditions you received very closely. You can also negotiate with the lender to eliminate the foreclosure charge before you take out a loan. 
2. Cash flow crunch
Foreclosing your small Business Loan can reduce the cash flow during the month when you make such payments. Be sure you weigh the repercussion of pre-closing the loan, and that you do not take out another loan to cover the cost of the earlier one. 
3. Usage of cash
It is not compulsory that you should prepay a small Business Loan if you can. Before you make the decision of loan foreclosure, be sure there are not any other financial obligations which you need to meet.  It could either be for purchasing new equipment or machinery, for inventory or just for other payments or seasonal losses. 
4. Taxes
The interest that you pay on your small Business Loan can be claimed as a deduction when you file your tax return. However, by paying off the loan early, you show higher profit hence you pay more tax. For small businesses, this may be the major cause for consideration. 
5. Credit score: 
A good credit score is a key criterion for qualifying for a small Business Loan. Generally, borrowing from financial institutions that report to the credit bureau is considered ideal. They report your payment history to credit bureaus, thus establishing your credit history and score, which can be considered in the future. If you are paying off enthusiastically, you can be assured of ease of getting a small Business Loan in the future. 
Nevertheless, foreclosing a small Business Loan can result in a huge loss to the lender - as mentioned earlier under 'foreclosure charges'. This could lead to the lending institution reporting unsatisfactory loan repayments to the Bureau thereby taking a toll on your credit score. One of the smartest ways to avoid this is to discuss the scenario in advance with the lending institution - or partner with institutions. 

While foreclosing your small Business Loan might seem like a good idea to reduce the debt burden, it is important to consider the above factors to reduce your risk.

Also Read :- Top 10 reasons Indian businesses face rejection for small business loans
Although the prepayment process is slightly different for each bank and financial institution, the basic procedure, as explained below, remains the same:  

  • Step 1 - Find the nearest branch  

Loan foreclosure cannot be done online, so you will first need to find the nearest branch of the bank or financial institution from which you have taken the loan. You can contact the customer care team of the financial institution for this.  

  • Step 2 - Submit the application 

You will need to apply for loan foreclosure. After that the lender will ask you to provide a pre-closure form.  

  • Step 3 - Submit all required documents  

The next step in loan foreclosing proceedings is to submit all the documents required by the bank or financial institution: 
-Identity proof - PAN card, Aadhaar card, driving license or passport 
-Loan documents 
-Loan account details 
-Bank statement as proof of last EMI payment and clearance.  

  • Step 4 - Prepay the outstanding loan 

Once all the documents are submitted, talk to the lender about the EMI and interest paid so far, applicable foreclosure charges and taxes as well as the date of loan repayment. You will then have to clear the outstanding dues by check, demand draft or online transfer in the form of NEFT or RTGS.  

  • Step 5 - Receipt of documents 

Once you cleared all outstanding debts, the bank or financial institution will proceed with the loan foreclosure formalities including closing all EMI notices and reminders, returning all original documents within 10 - 15 business days and handing over the following documents:
-Letter of acceptance 
-Pre-closed payment receipt 
-No credit certificates 
-No Objection Certificate for a closing Business Loan 
-Loan Closure Certificate

  • Step 6 - Report to credit rating agencies 

 Once all loan foreclosing formalities have been completed, you should notify credit rating agencies about the prepayment of your loan so that it can be updated in their records. 

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