In order to establish a business and run it efficiently, entrepreneurs require access to substantial capital. Moreover, the business expansion also requires a large amount of money. Therefore, to meet the financial requirements of their business, most entrepreneurs consider availing a business loan.
With leading banks and other NBFCs, availing a business loan has become a quick and hassle-free process. This makes business loans a preferred source of financing for entrepreneurs. Though availing a business loan can be extremely helpful, it is always recommended to repay the borrowed loan amount on time in order to avoid any inconvenience in the later stage.
Business loan repayment can be a difficult task if the business isn’t working and its finances take a hit. Defaulting on a business loan can have multiple repercussions depending on the terms and conditions of the business loan agreement.
Some of the most common consequences of defaulting on a business loan are mentioned below:
1. Drop-in credit score
With every missed installment of your business loan repayment, your credit score is affected negatively. This leads to a poor credit score, thereby reducing the chances of your loan application being approved in the future.
2. Legal Action or foreclosure
- Depending on whether you have applied for a secured or unsecured business loan, the consequences may vary.
- In case of a secured business loan, a foreclosure will allow the financial institution to have complete authority of all your assets and properties mentioned as collateral in your loan agreement. Generally, to recover their losses due to non-payment of the loan amount, lenders sell the collateral in a private or public auction.
- In the case of an unsecured loan, the lender may generally charge you a late fee.
- While approving an unsecured business loan, financial institutions usually ask for a personal guarantee or a lien to your business assets.
- Therefore, in case you default the loan, the lender can file a lawsuit against your business. Then the loan amount is recovered by following the orders of the court.
- However, if the lender is still not able to recover the loan amount, then your business may have to file for bankruptcy.
3. Increased rate of interest
- The inability to make timely repayment of your business loan may also result in an increased rate of interest.
- In some cases, you may also be charged a heavy late fee.
Now that you are well aware of the adverse consequences of defaulting on a business loan, ensure that you make timely repayment to avoid any inconvenience. By managing your expenses wisely and maintaining sufficient balance, you can repay the loan amount easily.
Also, make a note of the due date of your monthly installments. It will help you plan your finances in a better way. Though missing a single installment would not make you a defaulter, it may result in late payment penalties.
While availing a business loan, make sure that you read all the terms and conditions of the loan agreement carefully before signing it.