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Running a successful business comes with endless financial demands—from covering employee salaries and purchasing new equipment to funding renovations and pursuing expansion. Under such circumstances, taking out a business loan can be a practical solution to manage finances more efficiently.
However, securing a loan requires timely repayments through equated monthly instalments (EMIs). When unforeseen challenges arise, financial strain can make it difficult to meet these obligations, potentially putting your business at risk. In this blog, we’ll explore the impact of defaulting on a business loan EMI and share strategies for overcoming such challenges.
Equated Monthly Instalments, or EMIs, are fixed monthly payments that a borrower makes to a lender on a loan. These payments combine the principal and interest amounts charged on a loan, ensuring the loan is paid over a specific loan term.
Understanding the EMI amount and loan repayment terms helps business owners with budgeting and financial planning. Making timely EMI payments is essential for maintaining a good credit score and avoiding penalty charges.
Running a business comes with its own set of challenges. When unforeseen circumstances strike, defaulting on your EMIs becomes one of them. But what happens when you can’t pay your monthly instalments on time? Depending on your lender’s terms and conditions, you either delay or default on your loan repayment.
Loan delinquency suggests that you’re late on your EMI payments. When you miss a due date or two of your business loan repayments, your lender sends you reminders. You must pay the pending EMIs and get your business loan account back on track.
There’s also a chance your lender may charge you an EMI bounce charge for the late payments. Before signing the papers, you must read the related terms and conditions and clear your doubts with your lender.
A loan default is when you fail to make EMI payments even after receiving delinquency reminders over an extended period. Under such circumstances, the lender may send you a show-cause notice asking the reason behind late payments, a grace period to clear the pending, or even take legal action against you.
However, some lenders may even offer to renegotiate the repayment terms after understanding its causes. These policies differ from lender to lender; thus, reading the fine print cannot be overstated.
Although the reasons behind a default can vary, the impact on your business is primarily the same and severe. Below is a list of consequences your business might face if you default on your EMIs:
One of the most immediate consequences of loan default is seen in your business’s credit score. A dip in your credit score reflects lenders about your financial instability. Additionally, it affects your personal credit score if you've guaranteed the loan, making it difficult to secure personal financing.
Another consequence of loan default is the accrual of higher interest rates. Lenders might impose penalty interest rates, which can significantly increase the total repayable amount. This makes it even more challenging to manage payments and has a high chance of snowballing into an unmanageable debt.
If EMIs continue to bounce, lenders may initiate legal proceedings to recover their borrowings. Legal action against loan defaulters may range from demanding immediate repayment of the loan and late fees to asset seizure or even bankruptcy filings, depending on the type of business loan—secured or unsecured—you’ve opted for. The lenders may recover their money either by selling or auctioning off your personal assets or as per the court order.
A history of loan defaults raises doubts about your financial management skills, making lenders hesitant to offer you credit in the future. Even if you can secure a loan, it may come with unfavourable terms, such as higher interest rates or stricter conditions. Additionally, you may have to look into alternative ways to fund your business.
If your business is going through a financial rough patch, you’re not alone. It's essential to remember that there are various options available to help manage the situation and minimise the impact on your business:
When your cash flow is weak, and you may not be able to pay your monthly EMI, the first step is to contact your lender. Lenders are often open to negotiation, especially if you have a history of timely payments. You can negotiate to extend the loan term, reduce interest rates, or temporarily allow you to skip a few payments.
It's always wise to check your business expenses regularly and pinpoint areas where you can cut costs. Simplifying operations, negotiating better terms with suppliers, or reducing unnecessary spending are potential ways to cut costs and make room for loan payments. Prioritise your debts, allocate the funds strategically, and address only the most urgent liabilities to prevent further financial strain.
Managing debt can be overwhelming, especially with multiple loans with different terms and repayment schedules. Seeking professional guidance from financial advisors or credit counsellors can help you better understand your options and develop a realistic plan to repay your loans. These professionals can also negotiate with lenders on your behalf and help you manage your finances more effectively.
The best way to manage loan repayment challenges is to prevent them from happening in the first place. Here are some measures that business owners can implement to minimise the risk of defaulting on loans:
A financial plan is the foundation for any successful business. It outlines your revenue streams, expenses, cash flow, and financial goals. A well-thought-out plan helps you anticipate potential challenges and prepare for unexpected events. Regularly checking and updating your financial plan ensures you prioritise the most important urgent expenses.
Having a reserve fund in your bank account for emergency expenses acts as a safety net, providing you with the necessary funds to manage cash flow gaps. It helps you fulfil such immediate financial obligations without any monetary constraints. Such a reserve ensures that even if your business faces temporary setbacks, you can continue paying your EMIs and avoid defaulting.
Regularly monitoring your financial health is crucial to identify potential issues and address them promptly. Monitor your profitability, cash flow, and expenses to spot any early red flags. One critical step can help you avoid missed payments or penalties due to oversight or changing circumstances.
When taking out a business loan, consider your current and projected cash flow when deciding on the loan tenure. A longer tenure means lower EMIs but potentially higher interest costs over time. On the other hand, a shorter tenure can save on overall interest paid but result in higher monthly payments.
Repaying business loan EMIs does not have to be daunting. With careful planning and prompt action, you can successfully manage your loans while keeping your business on track toward growth and success. Always remember, prevention is better than cure, even when it comes to avoiding loan defaults!
At Quid, we offer business loans that meet your goals, necessities, and terms. Compare your loan options and apply for the one that best fits your requirements with just a few simple steps to fund and help grow your business successfully.
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