What Happens if You Can't Pay Your Business Loan EMIs?

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.

• Loan delinquency
  Loan delinquency typically means that you’re behind on your loan repayments. Such a situation occurs when you miss the timely payment of one or two EMIs of your business loan. In the case of loan delinquency, your lender sends you reminders about your missed EMI payments. You can pay your pending EMI(s) anytime to get your business loan account back on track.
  After clearing the pending EMIs, you can pay the remaining EMIs in the future as per their due dates. Your lender may charge you a nominal late fee or EMI bounce charge against the late payment of your pending EMIs.
   
• Loan default
  It is termed a loan default when you miss several EMI payments even after receiving loan delinquency reminders. When you default on your business loan, the lender may serve you a notice asking why the loan defaulted. The lender may also take legal action against you for failing to repay your business loan on time.
  However, lenders usually provide a grace period to clear the pending EMIs before resorting to legal action against the borrower. They also serve multiple show-cause notices before taking action to the court. Some lenders even offer to renegotiate the repayment terms with the borrower. Different lenders have different policies concerning loan default.
  You must read your lender’s terms and conditions carefully while applying for your business loan. It will help you know what your lender can do if you default on your business loan repayments.

Also Read :- Top 7 Benefits of Having A Business Loan for Shopkeepers

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 You Do 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.

How Can You Recover from A Business Loan Default?

Recovering from a Business Loan default can be a challenging process, but with dedication and strategic planning, it is possible to regain financial stability. Below mentioned are some handy tips that you can follow to recover from a Business Loan default:

• Assess the Situation: Understand the reasons behind the loan default and evaluate the impact on your business.  Also, give attention to the specific areas that need improvement.
• Communicate with the Lender: Openly discuss your situation with the lender and express your willingness to make amends. Negotiate a modified repayment plan or seek refinancing options that align with your current financial capabilities.
• Create a Realistic Budget: Develop a detailed budget that includes all your income and expenses. Cut unnecessary costs and prioritize loan repayments.
• Generate Additional Revenue: Explore avenues to increase your business's cash flow, such as expanding your customer base, launching new products or services, or implementing effective marketing strategies.
• Seek Professional Advice: Consult with financial advisors or business consultants who can provide guidance on debt management, restructuring, or implementing turnaround strategies.
• Rebuild Creditworthiness: Focus on rebuilding your credit score by making timely payments on existing debts and demonstrating responsible financial behavior.
• Learn from the Experience: Analyze the factors that led to the default and implement measures to avoid similar situations in the future. Develop robust financial management practices, maintain adequate cash reserves, and regularly review your business's financial health.

Remember, recovering from a Business Loan default takes time and perseverance. Stay committed to your goals, stay positive, and seek support when needed.

To Conclude

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.

FAQs

• Does late EMI payment affect credit score?

Yes, late EMI payments can negatively impact your credit score. Timely repayment of loans and bills is a crucial factor in maintaining a good credit score.

• How can I remove an overdue from CIBIL?

First of all, you need to repay the outstanding amount in full and get a 'No Dues' certificate from the lender in order to remove an overdue status from your CIBIL report. Once done, you can then submit a dispute resolution request to CIBIL with the required documents to initiate the removal process.

Disclaimer

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.
*Terms and Conditions apply