What Happens If You Are Unable to Pay Business Loan EMI?

Introduction

It can be possible to grow a business by availing a business loan. Whether you want to buy equipment, grow operations, or maintain cash flow, loans provide the necessary funds. At the same time, it is also crucial to repay the loan on time. If you do not pay your Equated Monthly Installment (EMI) payments, it will generate financial problems. Different MSMEs find it challenging to repay the loan because of unexpected losses, market competition, or lack of good financial planning.

Also Read: MSME will get a loan up to 50 lakhs in 45 minutes, SBI launches 'SME Digital Business Loan' facility

How to Repay Your Business Loan?

Given below are some tips for ensuring easy repayment of your business loan:

●      Create a Budget – Track your business income and expenses. Set aside a fixed amount for repayment of the loan on a monthly basis.

●      Increase Revenue – Concentrate on growing sales, lowering costs, and enhancing profit margins so you have sufficient money for EMI payments.

●      Take Advantage of Automatic Payments – Make sure to enroll in an auto-debit facility with your bank so that your EMI will be automatically deducted each month.

●      Maintain Emergency Funds – Preserve a part of your income in an emergency fund to handle difficult situations.

●      Negotiate with the Lender – If you face any financial troubles in your business, discuss it with your lender in advance. They might grant you a lower rate of interest or refinance your loan.

●      Reduce Unnecessary Expenses – Reduce unnecessary business expenditures to allocate money for repayment of the loan.

Also Read: Big News For The Customers Of This Private Bank, Hike In FD Interest Rates

What if You Don't Repay Your Business Loan?

If you can't repay your business loan EMI, it will affect you in many ways:

●      Late Charges and Penalties – The bank will impose late payment charges, cheque bounce charges, etc, which will add to your overall loan cost and become a burden to repay.

●      Credit Score Effect – Failure to pay EMIs will lower your credit score. This will affect you in obtaining future loans or any other financial assistance.

●      Legal Action – If you repeatedly miss paying your EMIs, the lender will take legal action to recover the loan amount, which will affect the goodwill of your business.

●      Seizing Collateral – Instead of an unsecured business loan, if you have availed a secured loan, the lender can seize the asset (property, equipment, or stocks) that you used as collateral.

●      Loan Recall – The lender can demand that you pay the entire amount of the outstanding loan at once if you continue to miss payments.

●      Debt Collection Calls – Banks and financial institutions can send reminders and recovery agents to you to remind you to settle the debt.

What Can You Do to Avoid Defaulting on the Loan?

In case of financial trouble, take measures not to default on the loan. Options are given below:

●      Talk to Your Lender – Several financial institutions and banks offer a few ways for borrowers who are facing financial issues. They may waive some charges, offer a grace period, or provide extended tenure on the loan.

●      Restructure the Loan – You may ask the lender to restructure the loan so that repayment is made simpler with extended tenures.

●      Consider Refinancing – You can get a new loan at a lower rate of interest and use it to repay the previous one. This reduces your monthly burden.

●      Identify Alternative Sources of Income – Search for a side business, freelance, or investment that will bring you extra income to use for paying loans.

●      Use Business Assets – Sell excessive or unused inventory, assets, or equipment to raise funds, which you can use for repayment of the loan.

●      Seek Financial Advice – Consult a financial advisor, who can help you in creating a new repayment strategy.

Also Read: ADB approves $500 million loan for India for development of green infrastructure

How Can You Recover from A Business Loan Default?

If you have already defaulted on your business loan, you need a good plan to recover. Follow these steps:

●      Analyze the Situation – Determine why you defaulted and review your business finances to resolve the issues.

●      Negotiate a Settlement – Discuss with the lender and agree to a repayment plan that suits your budget.

●      Take a Personal Loan – If at all possible, take a personal loan to settle the business loan and build your credit record.

●      Improve Your Business Cash Flow – Increase your sales, cut down expenses, and manage your finances better to start repaying.

●      Seek Legal Help – If the lender takes legal action, consult a lawyer to understand your options and rights.

●      Rebuild Your Credit Score – Start making timely payments for any remaining debts to improve your credit score over time.

Conclusion

Not paying the EMIs for the Business loan can lead to a financial crisis for your business and personally as well. It will cause issues such as penalty charges, legal issues, and damage to your credit score. With the help of a financial advisor make a proper plan to clear all your debts, and discuss your issues with the lender, so that they can suggest to you what to do and what not to do.

Additionally, NBFCs help MSME business owners to grow their business to the next level. With their quick access to funds with minimal documentation, they make it easy for MSMEs to manage their business financial activities. They also guide and support MSME business owners in case they are unable to pay their debts by offering them restructuring facilities, balance transfers, etc.