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What Happens to a Business Loan if the Business Loses?

what happens to a business loan if business loses

Starting a business is not an easy task and one of the major requirements is to seed-money. Resources are very important to be able to set up a large-enough business, market it properly and have enough employees. It is rare for people to have enough seed-money themselves, and hence need loans. It is equally difficult to keep your business going and enjoy regular profits. Even well-established companies face troubled times and would have started with a loan. 

 

Having a business loan to repay, in itself, is a daunting thought, added to the tensions and problems of running the business. An added complication, a very intimidating one, is when your business is facing a loss. At such times, one is faced with the dilemma between retaining funds to boost the business, or to pay to required loan amount timely. Defaulting on a loan should be avoided as much as possible, not only to properly meet the bank requirements but also to have own peace-of-mind.

 

A lot of entrepreneurs, for this reason, approach individual investors and loan providers, instead of going to banks. They feel that, with such individuals, these rules may be bent in times of need, and negotiations held. Such angel-funding and crowdfunding are also possible options, but you may sometimes end up paying high-interest rates. Additionally, a lot of people do not know about the options and opportunities that banks also offer in such cases.

 

This article lists out such options to deal with loan defaults. It also briefly explains some financial management tips to avoid situations of loan default. 

 

As soon as the lender anticipates a situation where the loan may be converted into a non-performing asset, it presents possible measures to the borrower to continue regular repayment. Only after these options are exhausted, does the lender begin active recovery.

Following are your rights and possible measures to avoid the extreme point:

 

  • Deferring the Payment

If the lender considers the conditions are valid enough, then that particular EMI or amount in the pre-decided loan payment cycle may be postponed. Moreover, this additional time period does not imply additional interest. Hence, this is a convenient option, at no additional cost, if you know that the business will pick up soon.

 

  • Reducing the EMI

This is an option where the amount for each monthly installment is reduced, to an amount that is convenient for the borrower, not just at present, but based on the anticipation of how the business is going to perform over the period of time that coincides with the loan repayment cycle. This overall reduction, hence, will increase the overall tenure of the loan. This, in turn, will have implications on the interest. This option should thus be availed when you know that you will be able to pay smaller amounts for some time.

 

  • Loan Restructuring

Some of the terms and conditions of the loan may be revised. These could include a reduction in the rate of interest or changing the moratorium. This is useful when a slight relaxation in loan repayment is needed.

 

  • One-time settlement

Finally, it is possible for a borrower to opt for settling the entire loan amount in one payment itself, instead of small EMIs. Within one-time settlement (OTS) also, there are different options – the payment maybe 100% of the loan amount at one time, or anything between 25-100%. Lenders prefer this as a last option, as it reduces their own profit.

 

In the situation where a deferment cannot be avoided though, do seek legal advice to clearly and more deeply understand your rights and options, and to get help in technical communication with the lender.

Besides these, there are some general tips to manage loans better:

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Top 6 ways to pay your business loan even during business loss

 

  • Keep a Consistent and Adequate Balance Amount

It is always advisable to have sufficient bank balance so that it can be depended upon when in need. It can act as a reserve amount, to be tapped into, to fulfill such important needs, without hampering the funds allocated for running the business. It can also be viewed as, keeping a reserve back-up of 3-4 months of loan EMI that will be required, and so, if this EMI cannot be withdrawn from business funds due to loss, this reserve fund can save you from defaulting.

 

  • Keep Reminders for Repayment Schedule

Have the schedule well organized and easily accessible, so that you have a chance to check for fund availability well in advance. This will also give you a chance to plan finances and expenses accordingly, make alternate arrangements if needed, especially in situations when your business is not showing a profit. Timely and regular repayments will maintain your positive image for the lender, making it more conducive for you to avail repayment options if needed later.

 

  • Debt Restructuring

The amount to be paid may be substantial for you, especially if the business is small or medium-sized. The terms of the loan may be restructured and rescheduled, even before a condition of possible default arises. Depending on how the business is actually performing and your financial situation, including unforeseen expenses, the interest rates, amount of monthly installment, etc. may be revised. Remember, however, that this will adversely affect your credit score, but this will be a small compensation as compared to defaulting on repayment.

 

  • Regular and Transparent Communication with the Lender

This is necessary for the lender to have a clear picture of your financial situation and have enough time to plan for options and measures that may be required. Timely communications will help the lenders in reducing their own paper-work and loss, and you may be able to avoid even one default on your loan. This approach will allow lenders to present you with more options to choose from, minimizing your cost.

 

  • Refinance

Several lenders assist in refinancing loans, by providing options of smaller EMIs for longer durations of time. This is a financing option that you may use to avoid short-term loans. Short-term loans require a comparatively larger chunk of funds as the EMIs would be higher. These chunks are substantial enough for you to feel the pinch, preventing you from utilizing them to give a boost to your business. A smaller amount, on the other hand, maybe negligible enough, allowing you to simultaneously invest in your business and repay your loan. This is a precautionary option, depending on your needs and inclinations.

 

  • Allocate Funds for Loan Repayment as a Priority

Proper management of funds, even taking the services of a financial advisor if needed, is very important. All monthly activities, expenses, and requirements are not always uniform. Several tasks may crop up but maybe avoided at present, till the loan is repaid. Such substantial expenses should be avoided as much as possible.

 

In conclusion, do take steps to manage your funds and especially loans, wisely and prudently. In case of business undergoing loss, study your finances and options well in advance so that both, you and the lender, can take appropriate and timely steps to avoid a worst-case scenario. Be clear and proactive with communications and do not avoid any notice from the lender. Everyone wishes for their businesses to flourish and simple steps can take you a long way.

 

Above all, we at FlexiLoans always understand and try to tweak our policy for you genuine customers like you. Therefore do not hesitate to openly talk to us. We will help you not only repay loans but provide you with funding to save your sinking business.


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