So, you default on business loan EMI – not the best place to be, but what steps should you take now to ensure that your monthly loan instalments are paid in time and your credit score and creditworthiness are not affected?
It is not an unusual circumstance for borrowers to be unable to replay loan EMIs in time. Many a times, even with the best intentions, borrowers are unable to pay back. When it comes to MSME businesses, there might have been a poor sales cycle, or customer payment delay, or unexpected expenses – all of these causing a sudden dent in business finances leading to the unwanted scenario of not repaying the small business loan EMI.
So, what happens next? Do you have to pay a fine or interest during your next loan EMI? Will your case be reported to the authorities? Will you be blacklisted and unable to take business loans in the future? What legal action will the lender take? Let us not speculate.
There are processes for business loan application, and there are processes and steps taken when you miss an EMI payment. Let us look into them.
What happens when you default on business loan EMI?
Let us start by understanding what is the meaning of defaulting a loan EMI?
When you need funds for your business, availing a small business loan is the natural choice. When you approach a bank or NBFC for business loan, the lender checks a few details and offers you the loan amount. On the principal amount, the lender will add interest, processing fees, documentation charges etc. The lender will finally let you know the sum you will have to repay monthly also known as EMIs or Equated Monthly Instalments which includes the interest that the lender collects.
Inability to repay this EMI on the scheduled date is what is known as defaulting a business loan EMI.
Sample business loan EMI calculator
|Principal loan amount: ₹25,00,000 Interest rate: 15%|
|*Note: The business loan EMI interest rate includes the principal, loan interest, and fees and varies between lenders. Borrowers are requested to check with their lenders before availing a loan. To check your EMI for business loans through Tata nexarc, try our online EMI calculator.|
As such, when you default on your commitment to repay a specified amount within due dates there are some minor and major consequences. Listed below are some of the consequences when you miss to repay business loan EMI:
1. An immediate dip in your credit score
This is the first thing that happens when you miss an EMI repayment – there is an immediate drop in your personal and business credit scores.
Lenders always check the borrower’s credit score before disbursing funds. Usually, a credit score of 750+ is considered healthy and suitable for loan approval. As such, if your credit score dips, not only is your creditworthiness in question, but lenders will consider lending to you risky, and will likely reject your business loan applications in the future.
2. Difficulty in getting loans in the future
By defaulting, you set a bad example and not considered a trustworthy borrower. Naturally, it gets difficult to get a loan in the future.
Businesses require loans for multiple reasons – working capital, buy vehicles, inventory, equipment, pay rent, lease property etc. And lenders provide different kinds of loans to meet the diverse business needs. Inability to repay any loan directly impacts your reputation and ability to borrow another loan.
For example, if you default EMIs on working capital loan, it’s difficult to secure a commercial vehicle loan, as you already get listed as a defaulter.
In many cases, banks insist on getting a collateral for SME business loans to ensure their risks are minimised and they have the means to recover their funds if you ever default.
3. Payment of fines and additional charges
It goes without saying, but defaulting means you will be liable to pay fines and additional charges. When you default, the lender can take any suitable action. For instance:
- They may sue you (generally this is the last step the lender takes)
- They may send you a reminder/notice on non-payment of EMI with details on fines, late fees and EMI bounce charges you will have to pay
- Seize your collateral (e.g., vehicle in case of a vehicle loan) and liquidate the asset to recover losses
Different lenders have different terms and can take any suitable action to recover payments. It is recommended to read and understand the loan repayment terms carefully before taking a loan from any lender.
What you can do in case of loan default?
A business loan repayment terms are drawn such that both the borrower and lender can benefit from the transaction. As such, when you miss an EMI payment, the lender will first look for a gentler way to recover the EMI, allow a grace period before taking stern legal actions. In many cases, lenders may also consider re-negotiating payment terms to make it possible for borrowers to repay. It is advised that when you borrow a loan, you negotiate your loan offer and repayment terms carefully and in detail to avoid any difficult situation.
Here are three things you can do when you are unable to repay business loan EMI:
- Inform your lender before the due date. When lenders are aware of your financial challenges and inability to repay, they often provide a workable solution. They may be willing to extent the payment date, reduce the fine, or take any other lighter measure than legal action or forfeiture.
- Check on delayed payments from customers. You may even consider getting an early payment at a small discount from customers to ensure that you don’t default on your instalments.
- Contact your guarantor on their ability to back you. While this might not work in the long-term or huge sums, for smaller loan instalments your guarantor might be willing to support you financially (since you defaulting will also impact them).
Steps to take to avoid EMI non-payment
As can be understood, being a defaulter is not a situation you would want to be in. Neither will your lender want you to default as it would call for additional hassle for them. As a MSME owner, what you can do is take a few steps that can reduce the chances of defaulting a loan:
- Calculate the loan amount you absolutely need. Understand your business needs and take the minimum loan you require. Remember, the objective of the loan is to meet a business need – so evaluate and seek a suitable amount that you will be able to repay.
- Time your loan appropriately. If you can foresee expenses in the future, it is unadvisable to seek a loan as chances are higher that you may miss a payment on time. On the contrary if you are awaiting multiple payments in the next few months, you may consider taking a loan as you will soon have funds to repay. Timing your loan request is important.
- Compare multiple lenders, the payment terms and loan interest rate offered before finalising one. In general, public sector banks offer lower interest rates compared to private banks. You may also consider checking the various government loan schemes.