Even the best plans can go astray in the long term. The same happens in a business, when one starts a business they look for all the possible drawbacks and make a strategic plan to overcome all of those. Every business owner/ entrepreneur, at some point, opts for a business loan. Everyone has the best business plan, to make a profit & to repay the loan as soon as possible.
However, the situations are not the same always and a sudden decline in sales, miscalculations, or other unforeseeable circumstances, your planning and finances are affected badly. In such a situation you may not be able to make your monthly instalments on time. As a result, this causes to default on your business loan.
Your debt against your business that you can’t afford to repay can seriously affect both your business as well as personal credit score. This can affect your future borrowings which may include higher interest rates for future loans and possible rejections for loans in the future.
What is a Loan Default?
Loan default happens when a borrower breaks or failing to observe a law, agreement, or code of conduct which was decided in the loan agreement payments as per the conditions mentioned in the loan agreement. This can result in legal action against the borrower by the lender.
Consequences of a Business Loan Default
1. Drop-in CIBIL Score
Every a single default in an instalment is reported to credit agencies by the lenders. This leads to a drop in your personal as well as business credit scores. This further decreases the chance of being approved for any loan in the future.
2. Increased Rate of Interest for Future Loans
Once your CIBIL score drops, there are less chances to get approved for other loans in the near future. However, you may get approved for some loans depending on the lender, but in that case, the interest charged will be higher than others. So, this will affect your current loan repayment as you need to pay a higher EMI & future loan approvals too.
3. Legal Action or Foreclosure
In case of a business loan default, the actions also depend on the nature of the loan. In case of a secured loan, the lender has the complete authority of all the assets/ properties which has been given as collateral against the loan. In case of a major default, lenders have the right to sell the collateral through auction to recover their money.
In the case of unsecured business loan, the lender can’t do much. Hence, they charge you a late fee initially.
However, even in the case of an unsecured loan, the lender asks for a personal guarantee. On failure, the lender can file a lawsuit against your business owner as they don’t have collateral to sell and recover their money.
4. Difficulty in Getting Approved for Loans in Future
Once you default on any kind of loan, whether business or personal it reduces your credit score, this makes it extremely difficult to procure any loan in the future mostly for your business. Hence, you need to find alternative ways to fund your business in the future.
If you default on a business loan, the lender can take legal proceedings to recover their money. As discussed above, In the case of secured loans, the collateral is seized. For unsecured loans, as discussed earlier, lenders will take legal actions and will take you to the court. And as per the court, you will have to repay the loan. However, in case the lender is still not able to recover the money, then your business will be filed for bankruptcy.
How to Avoid Defaults in your Business Loan?
- Be aware of your EMI dates.
- Have sufficient balance in your bank account for the EMI
- Plan your business expenses well
- Manage your profit efficiently
- If repayment seems tough, talk to your lender and ask for some help as in time or to reduce your EMI.
- Go for debt consolidation when you have no other option.
- Take legal assistance when legal actions are to be taken against you.
Always try to avoid defaults in business loan, plan well and start taking actions before it’s too late.