Being a small business owner, you know what it takes to start a business from scratch and expand it to greater heights. You might have faced several challenges during your business journey. One of the significant challenges most small business owners like you face is inadequate working capital.
A regular inflow of finances is essential to conduct day-to-day business operations. Everything requires money, from procuring inventory, paying wages to employees, renovating or expanding business premises, and purchasing expensive business equipment. And without adequate financing, it can become challenging to run a business smoothly.
This is why small business owners like you choose to take out small business loans. These loans are specifically provided to help small business owners grow, establish, and expand their businesses. You can take a business loan to meet your various business-related financial requirements and repay the loan amount in Equated Monthly Instalments (EMIs).
How to repay your business loan?
A business loan gives you instant access to working capital. You can use this money for various business-related purposes, such as buying raw materials, training and hiring staff, upgrading business equipment, renovating workplace infrastructure, spending on marketing and advertising, and managing day-to-day expenses.
You can then repay your loan by paying an instalment every month. Your EMIs include the principal loan amount and the interest accrued on it by the lender. Several factors, including your loan amount, tenure, and business loan interest rate and charges, determine the EMIs you need to pay every month towards the repayment of your business loan.
It’s very crucial to pay all your EMIs on time. The timely repayment of your business loan boosts your credit score and enhances the reputation of your business. Additionally, it increases your chances of getting a business loan again.
What happens if you fail to repay your business loan?
When you apply for a business loan, you intend to repay it on time. But sometimes, things do not pan out as per your planning. A sudden unexpected situation, such as a medical emergency, broken equipment, order cancellation, delay in payment, or a general downswing in business, can result in a financial crisis.
It might not be possible for you to pay your business loan EMIs in time in such a situation. This can lead to the delay or default of your business loan repayment.
What can a lender do in case of loan default?
If you cannot repay your business loan even after the grace period, you can declare yourself bankrupt. Under such circumstances, your lender may take action based on whether your business loan was secured or unsecured. When a secured business loan goes into default, the lender seizes the asset kept by the borrower as collateral to recover the loan amount.
For example, suppose you’ve availed a business loan by keeping your business equipment as collateral. In that case, your lender may take possession of your equipment if you default on your business loan.
In case of an unsecured business loan, the lender may take legal action against the business owner by suing their business. It may also file a request in the court to take over some of its assets to recover its losses.
How can it affect the borrower?
Defaulting on a business loan can prove to be detrimental for the borrower. When the lender moves to a court or acquires business assets, it hampers the business owner's reputation. It can also affect the borrower's personal and business credit score, which reduces their chances of getting a loan again in the future.
The borrower may also have to face legal action against them and pay adequate compensation to the lender as per the court's orders. They may have to lose possession of their precious assets and even file for bankruptcy.
What can do you to avoid loan default?
Now that you’re aware of what can happen if you default on your business loan, let us tell you what you can do to avoid such a situation:
1. Borrow only what you need
Apply for a business loan only if required. Do not start an unnecessary debt if you can do without availing of a loan. Also, you should choose your loan amount carefully. Assess all your requirements and opt for an appropriate loan amount that is neither too less nor too high.
2. Choose your loan tenure carefully
Business loan tenure is a crucial factor that determines its EMIs. A longer tenure results in lower EMIs and vice-versa. You need to select your business loan tenure carefully. Make sure that your EMIs remain affordable so that you can pay them easily.
3. Compare between lenders
Business loan interest rates and charges vary from lender to lender. You should compare various lenders and their business loan products before applying for the one offering the best interest rates. This will help you in keeping your EMIs to a minimum.
4. Check your EMIs in advance
Before getting a business loan, make sure that you can pay its EMIs without any hassles. The best way to do this is by checking your EMIs in advance and evaluating whether you can pay that amount every month or not. You can use an online business loan EMI calculator to derive your business loan EMIs.
5. Keep a track of the due dates
Always keep track of your EMI due dates. Ensure that you repay all of them on time. You can also sign-up for the auto-debit facility to pay your EMIs automatically from your bank account.
Availing of a business loan can help you establish and expand your business immensely. However, it's equally important to repay your loan in a timely fashion. Failing to do so can do more harm than good.
At Poonawalla Fincorp, you can apply for an online business loan from the convenience of your home. Our loans come with many benefits, such as competitive interest rates, flexible tenure, and round-the-clock customer assistance.
How magical was the day when you discovered your career path? After a lot of research, putting in so much hard work, late nights, your heart and soul, you have become what you are today.