Foreclosing Business Loan

Here’s How to Foreclose a Small Business Loan

July 28, 2022 • 13582 views

When a business begins to grow and flourish, it’s natural to assume that the owners will be intent on clearing their debts and closing any existing loans as soon as possible. However, the decision to apply for the foreclosure of a loan depends on lots of factors and considerations. 
Understanding the loan foreclosure process and the steps involved is important to ensure a seamless experience. In this guide, we'll walk you through the steps you need to take to foreclose a Small Business Loan and provide helpful tips to make the process as efficient as possible. Read on to learn more about how to foreclose a Small Business Loan.

What is a Business Loan?

Business Loans are financing options that commercial enterprises can avail of to meet various requirements related to the business. Small businesses can apply for a Business Loan to fulfil different business goals, be it to increase working capital, buy new machinery, and more.

These days, Non-Banking Financial Companies (NBFCs) offer Small Business Loans without collateral or unsecured Business Loans through 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. In some cases, a small business owner may choose to repay the loan before the loan tenure ends, which is called 'foreclosure'. 

What is Loan Foreclosure?

Loan foreclosure refers to the process of closing a loan by making the full payment before the end of its tenure. It essentially means that the borrower is paying off the outstanding principal amount along with any interest and charges that may apply. This is usually done to save on the interest cost that would otherwise accrue over the entire loan tenure.

In some cases, lenders may charge a prepayment penalty for foreclosure, which is a fee imposed on the borrower for closing the loan early. Before opting for loan foreclosure, it is crucial to thoroughly review the loan agreement and understand the terms and conditions.

Also Read: What are the Sources of Funding for Businesses in India?

What are Foreclosure Charges and How is it Calculated?

Foreclosure charges are the fees charged by a lender when a borrower pays off the loan before the agreed-upon tenure. It can vary from lender to lender and is usually calculated as a percentage of the outstanding loan amount.

The calculation of foreclosure charges is based on the principal amount, the prepayment amount, and the tenure of the loan. The charges may range from 2% to 5% of the outstanding loan amount, depending on the lender and the terms of the loan agreement.

Benefits of Loan Foreclosure

The top three benefits of loan foreclosure are:

  • Lower Interest Costs

Loan foreclosure helps to reduce the overall interest cost of the loan. When a borrower pays off the loan before the agreed-upon tenure, they save on the interest costs that would have been charged for the remaining period of the loan.

  • Increases Eligibility for Future Loans

Loan foreclosure can also increase the borrower’s eligibility for future loans. When a Small Business Loan’s repayment is cleared early, it shows that the business owner is a reliable borrower. This can make it easier for them to get approved for future loans.

  • Reduces Financial Stress

Loan foreclosure can help reduce financial stress and allow business owners to focus on business growth. And other profitable actions.

Things to Remember Before Foreclosing a Loan

There are a few things that you should keep in mind before foreclosing a loan. Here are some things to remember before taking this step:

  • Explore Other Options

Before deciding to pre-close, explore other options such as partial pre-payment or balance transfer. These alternatives can help reduce the interest cost and tenure of a Small Business Loan.

  • Consider the Costs

Pre-closure can result in additional charges, such as pre-closure charges, processing fees, and other applicable fees. It's important to understand these costs before making a decision.

  • Communicate With Your Lender

When considering the pre-closure of a Small Business Loan, it's important to communicate with the lender to understand the pre-closure process and the charges involved. They may also be willing to offer a better interest rate or waive some of the charges.

Also Read: Ideas to Transform Your Small Business in India in 2024

What are the Steps to Foreclose a Loan?

Although the prepayment process can vary among different financial institutions, the basic procedure, as explained below, remains the same: 

1. Understand the Loan Agreement

Firstly, the borrower needs to review the loan agreement to understand the terms and conditions related to foreclosure, including the foreclosure charges and prepayment penalties.

2. Check Outstanding Balance

The borrower should then check the outstanding balance on the loan to calculate the amount required to foreclose the loan.

3. Inform the Lender

After this, the borrower must inform the lender of their intention to foreclose the loan either through a written request, by visiting the nearest branch, or online.

4. Make the Payment

Once the lender has been informed, the borrower needs to make the payment for the outstanding amount. This can be done through online payments, by visiting the lender's branch, or by sending a cheque.

5. Receive the NOC

Once the payment has been made, the lender will issue a No Objection Certificate (NOC), stating that the loan has been foreclosed. The borrower must collect all the documents related to the loan, including the original loan agreement, receipts of payments made, and the NOC.

RBI Guidelines on Business Loan Foreclosure

Business Loan foreclosure is a process by which a borrower can repay the loan amount before the end of the loan term. The Reserve Bank of India (RBI) has issued guidelines regarding Business Loan foreclosure that must be followed by all lending institutions in India:

1. According to RBI guidelines, lending institutions are not allowed to charge any prepayment penalty on floating-rate loans. However, in the case of fixed-rate loans, the prepayment penalty cannot exceed 2% of the outstanding loan amount.

2. Furthermore, lending institutions are required to inform borrowers about the prepayment penalty and other terms and conditions related to Business Loan foreclosure at the time of sanctioning the loan. The RBI also mandates that the prepayment penalty should be mentioned in the loan agreement.

3. In addition, the RBI has advised lending institutions to ensure that the foreclosure process is transparent and fair. Lending institutions should provide borrowers with all the necessary information regarding the foreclosure process, including the outstanding loan amount, interest rate, and other charges.

Overall, the RBI guidelines on Business Loan foreclosure aim to protect the interests of borrowers and ensure that they are not charged exorbitant fees for prepaying their loans.

To Conclude

In conclusion, businesses need to have a clear understanding of the various aspects of Business Loan foreclosure. With the RBI's guidelines in place, borrowers can rest assured that they are protected from any unfair practices by lenders. However, it is always advisable to consult with the lending institution to understand the terms and conditions related to Business Loan foreclosure. By doing so, businesses can make an informed decision and avoid any potential financial setbacks in the future.


We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
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poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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