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Tata Capital > Blog > Loan for Business > What Happens When You Default on a Business Loan and How to Avoid it

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What Happens When You Default on a Business Loan and How to Avoid it

What Happens When You Default on a Business Loan and How to Avoid it

When you take out a business loan, you have all the intentions to pay it back. The future, however, is uncertain and many a time, business owners simply can’t make timely payments and default on a loan. This can be a result of slow growth, decline in revenue, or other unforeseeable circumstances. So what exactly happens if you default on your loan? More importantly, how can you avoid such a situation?

Let’s find out.

1. What is a Loan Default?

A loan default occurs when a borrower breaches a business loan agreement’s terms i.e., fails to make the instalment payments as agreed upon. As a result, the lender can take legal action against the borrower.

The following are some consequences you may have to face if you default on a business loan.

Business Loan Default

2. CIBIL Score Drop

Every single instance of default on an instalment is reported to credit agencies by your lender. Ultimately, this leads to a drop in your business and personal credit scores, which decreases your chances of getting a loan in the future.

CIBIL Score Drop

3. Difficulty in Future Approvals

Once your credit score drops, it becomes difficult to secure loans in the future. Even if you do get a loan approved, you may be charged a high interest rate. This will naturally affect your repayment capacity as you will have to pay higher EMIs.

Difficulty in Future Approvals

4. Legal Action

If you have taken a secured business loan, the lender can seize control over your pledged assets and properties. To recover their loss, they may sell the collateral in a private or public auction. If your loan is unsecured, the lender will typically charge a late fee. They can also file a lawsuit against your business since they don’t have collateral to recover their losses.

Legal Action

Additional Read:- 10 Benefits of Taking a Business Loan

5. How to Avoid Loan Default

To avoid defaulting on your loan, take the following steps.

  • Maintain sufficient balance

Always have sufficient balance in your bank account to pay your EMIs on time. It is advisable to maintain at least 3 months’ repayment amount in your account.

  • Be aware of EMI dates

Stay abreast of the due dates of your monthly instalments to make sure you have the required amount in your account. This will also help you plan your finances should other expenses come up. Do note that even if you do miss an instalment, you don’t automatically become a defaulter; you will, however, be charged a late fee.

  • Refinance

If the monthly instalments are proving to be a bit too much, refinance your debt. Many lenders will help you refinance your business loan. As a result, you may get more favourable terms and smaller instalments.

How to Avoid Loan Default

Additional Read:- Financial Habits That Will Help You in Getting a Faster Business Loan

When it comes to repaying your business loan, try to never miss a payment. If you’re looking for easy business loans, get in touch with Tata Capital today!

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