Every business goes through the ups and downs before they become an established business. Every business irrespective of its size and age will have to face both profit and loss now or then in its journey. Such profits and losses have a deeper impact when the business is in its initial stage. The small profits are enough to encourage a small business owner to work harder whereas a loss can be disappointing and bring discouragement. The disappointment can be even more if the business which has faced loss was under a business loan and had to default on the business loan.
Business loans are very useful tool to establish and run a business smoothly. They help the business owners by providing financial support when they need it the most. Knowing the fact that, profit and loss both are parts of the business, one must be aware of the consequences that can happen to a business loan when the business has to face a loss.
The credit to a business can come mainly from two sources: firstly in the form of a business loan from bank and secondly a credit through individual investors via crowdfunding, angel funding etc. If you default a loan which is from an individual (angel funding) then one can go for negotiation to extend the time for repayment. With an extended time, one can even settle the loan with their individual asset. If your lender is an individual then you will get a better scope to negotiate as no individual lender generally take a legal recourse very fast to settle the dispute.
In another scenario, when the lender is a bank and you are under the hard and fast rules of a professional lender, you are to handle the situation bit differently. Even a business loan from the bank which got defaulted can take some measures to minimise the adverse effect. At an initial stage, when you are not paying your EMI for a few consecutive months, the lender may anticipate that your loan may turn to be a non-performing asset and the lender starts taking steps to make sure that the loan repayment happens regularly. If the initial step does not work, they will ultimately initiate the recovery process.
Though you may have defaulted on the business loan, still there are some rights of every loan defaulter which can be utilised at that time. Before the extreme happens the borrower can talk to the lender and can take the given steps.
How to Deal with Business Loan when Unable to Repay
A defer payment of the loan is a postponement of payment which is allowed under certain conditions and during which interest does not accrue. A loan defaulter can request the lender for such kind of consideration so that he/she can get some more time to make the business run once again and continue the repayment process.
This is another way to minimise the loan burden. Reducing EMI will simultaneously be resulted in increasing the loan tenure. While adopting this trick, you should not forget that you are increasing the cost of borrowing by stretching the tenure. But at the same time, a reduced EMI amount will help you to fight the financial disaster.
Restructuring the Loan:
The restructuring of a loan is done when the borrower requests the lender for relaxation of original terms and condition. If the lender agrees with this request, they can ease certain terms like reducing the interest rate, moratorium on interest repayment and so on. In this way, the borrower gets some advantage and it becomes easier to repay the loan.
Another way which can be adopted when you had a business loss is ‘One-time settlement’ or ‘OTS’. As per the guidelines of RBI, when a business turns to NPA, the lender has to make a provision to OTS to the borrower. The OTS makes the borrower pay 25% to 100% of the outstanding amount at a time and settle the loan. The OTS hampers the profitability of the lender.
In the events when you can’t pay your loan off, the lender may take legal action to reclaim the value of the loan amount, the outstanding interest, fees, and cost. But it is evident that generally no lender goes for legal actions and tries to work with you to rectify the situation. One has to be communicative and forthcoming about the challenges you are facing with your business as well as the loan repayment. If you start ignoring calls the calls and meetings of collection agents, the consequences can be really measurable. In the extreme situation, one may end up with having to file bankruptcy too. So whenever you avail a business loan, you must ensure that you make the repayments on time and at the same time the unpredictability of the business should also be in consideration.