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What Happens When You Default on A Business Loan? [How to Avoid it]

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There can be many reasons for non-repayment of loans like miscalculations, the decline in sales, or other impacts. When there is no proper income, there can be a miss of monthly installments. So, defaulter’s definition can be when a loan default happens by breaching on decided terms of the loan agreement. This tends to lender resorting to legal action against the borrower. If you have an MSME registration and have taken an MSME business loan, you may be covered under their policy, and MSME would be taking care of loan repayment in their way. Defaulting can be in two types of loans –

When taking a business loan from a bank or a finance institute, it is expected to repay it on the predefined terms and conditions agreed as per the loan contract. Consider that none of the loans is repaid, and then what will the government do? How will it run the financial institutions and banks? Similarly, if a business loan is not repaid, then the borrower of the loan becomes an automatic defaulter.

Defaulting on a secured loan

A secured loan means the loan for which you have put collateral. If you default on the loan and can’t set up some agreement with the lender, he can seize the collateral and try to get his money back. It varies from state to state as some states need no judgment, but some need court statements for seizure. This is time-consuming, so most lenders want to avoid it.

Defaulting on an unsecured loan

In an unsecured loan, there is no collateral involved. A personal guarantee of business assets can be replaced in the case of a defaulter. Late fees begin once you miss an installment, and even interest rates may also be increased. On the failure to recover the loan, the lender can file a lawsuit and somehow try to extract money from your business or personal assets.

Avoiding loan default

Loan default can affect your financial dealing adversely, and it can ruin your image too. Sometimes one can’t avoid it, but the options should always be open.

What one needs to do to avoid loan default?

  • Contact the lender immediately: If you feel struggling for repayments, contact the lender at the earliest, he may reschedule the term. It is always better to keep communication open for both sides as that can avoid future steps.
  • Pay partial if full is not possible: Your willingness to pay is essential, so you can repay whatever amount you can and inform the lender about it.
  • Consult debt counselor – If you are struggling under heavy debt and can’t see any way of repaying, you can visit a debt or credit counselor for advice. Through their debt management plan, they can guide you.
  • Visit a bankruptcy lawyer: Bankruptcy can’t be far if you miss on loan repayment. It can have more significant implications than the default for your credit and finances. If you want to file for bankruptcy, take an experienced lawyer’s advice to get some options.

The default in business loan impacts negatively as follows so you can plan some steps –

  • Drop-in credit score
  • Increased rate of interest
  • Legal action or foreclosure
  • Difficulty in getting approved loans in the future
  • Declaring bankruptcy
  • Maintain sufficient balance
  • Be aware of your dates
  • Refinance
  • Communicate with the lender
  • Reschedule your debt
  • Manage expenses and prioritize debt
  • Seek legal assistance

Frequently asked questions (FAQs):

1. What is an MSME loan?

MSME full form – Micro, Small, and Medium Enterprises, and they empower those who want to start new businesses or revive old ones. The loan is offered under various categories.

2. Is loan default a criminal offense?

Loan default is not a criminal offense unless it is done with the intent of fraud. If fraud is proven, it becomes an offense.

3. Can I avail an unsecured business loan?

Yes, you can easily avail an unsecured business loan from a reputed NBFC like Ziploan.

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