Every business goes through ups and downs before it becomes an established business. Every business, whatever its size and age, will face both profit and loss at some point in its journey. Such profits and losses have a profound impact on a business when it is in its initial stages. Small gains are enough to encourage a small business owner to work harder whereas a loss can be frustrating and bring disappointment. The disappointment can be even greater if the business that suffered the loss was under a business loan and had to default on the business loan.
Business loans are very useful tools for setting up and running a business smoothly. They help business owners by providing financial support when they need it the most. Knowing the fact that, both profit and loss are part of business, one should be aware of the consequences that can happen for business loans when the business faces a loss.
Definition of loan default:
In simple words, a loan default occurs when a borrower breaches a certain term of the loan agreement. Generally, this happens when a borrower does not make the agreed installment payments. This results in the lender taking legal action against the borrower.
Effects of defaulting on an unsecured business loan in India
Every entrepreneur, at one point or another, has considered taking or has taken out a business loan. Everyone has the best intention of paying off debt. However, due to situations like a sudden drop in sales, wrong calculations, or other unforeseen circumstances, your financial position gets affected, and you might not be able to make your monthly installments on time. Because of this, you might default on your business loan.
The effects of defaulting on a Business Loan vary according to the terms and conditions of the trade agreement. They can also affect your credit score. Below is a list of the consequences of defaulting on your business loan.
If you are finding it difficult to repay your loan, there are many options available. Below are some pointers that will prevent you from defaulting on your business loan.
Credit for a business can mainly come from two sources: first in the form of a business loan from a bank and secondly credit from investors through crowdfunding, angel funding, etc. If you default on a loan that is coming from an investor, you can go for negotiation to extend the time for repayment. One can use the extended time to settle the debt.
In case of a default, the borrower is subject to the rules of a professional lender and will have to handle the situation accordingly. However, the borrower can take some measures to minimize the adverse effects of defaulting on a loan by being pro-active. At the initial stage, if you are not paying your EMIs for a few consecutive months, the lender may anticipate that your loan may become a non-performing asset and hence the lender might start taking steps to ensure that the loan repayment takes place regularly. If the initial steps don’t work, they will eventually start the recovery process.
So, when it comes to debt management, always make sure you are regular with your payments. If you still feel that you are going to default on your loan, doing nothing is not an option. You must initiate a dialogue with the lender to appraise the lender of your situation and discuss the way ahead.
Poonawalla Fincorp is your one-stop solution for all types of loans. You can easily apply for our online business loan on the go.
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