What Happens To Business Loans If The Business Isn’t Working?

Business loans help entrepreneurs raise immediate capital to cover numerous business activities, including rent, employee salaries, working capital, expansion and marketing. These loans do not require pledging an asset as collateral, and applicants can receive the amount within 48 hours. This way, they can avoid using their savings or assets and fund company activities effectively. However, like other types of loans, the lender requires the borrower to repay the principal amount with interest within the loan tenure.

Since business loans create a financial obligation to repay the loan amount, entrepreneurs must ensure that their business has enough cash flow for repayment. However, occasionally, the company may have inadequate revenue or cash flow to repay the loan. In such cases, the business may fail to repay the loan to the lender. Most entrepreneurs are confused about the next steps if their business isn’t working. However, to understand what happens, you must understand business loan defaults in business financing.

What Are Business Loan Defaults?

Business loans are ideal for raising immediate capital and ensuring adequate funds for a business. However, you must repay the principal amount and interest to the lender within the loan tenure.

When you apply for a business loan, you repay the loan for the business through EMIs from the company account. However, if the business is not earning enough revenues or profits, you may fail to repay an EMI or the outstanding loan to the lender. Such a situation where the entrepreneur fails to fulfil the repayment obligations to the lender for the taken loan for business is called a business loan default.

What Are The Consequences Of Defaulting On A Loan For Business?

Defaulting may result in various adverse outcomes for the entrepreneur and the business. Here are the products of defaulting on business financing raised through a loan for a business.

• Decreased Credit Score

This three-digit score out of 900 showcases your creditworthiness. Lenders analyse the credit score and approve the loans if the score exceeds 750. If you default on the business loan repayment, your credit score decreases because of the default, jeopardising your chances of getting a loan approved in the future.

• Increased Interest Rate

Once you default on the loan for business repayment, your credit score may drop, and you will cease to fulfil the eligibility criteria set by the lender. For such a case, lenders include a term in the loan agreement to increase the existing loan's interest rate for business. If you default, the interest rates will rise, or you will have to pay a significant late fee.

• Legal Action

If your business is not working, you may miss paying multiple EMIs. The legal consequences may vary depending on whether you have applied for a secured or unsecured loan.

In the case of an unsecured loan for business, there is no collateral, and the lender charges a late fee. However, if you fail to pay the late fee charges, the lender can file a lawsuit against you in court. In the case of a secured loan, the lenders require pledging an asset as collateral, which they can sell to recover the outstanding loan amount.

• Future Loan Rejection

Once you have defaulted on a business loan, it creates a chain reaction where your credit score drops, and the default is visible to lenders when they analyse your credit history. The default significantly lowers your creditworthiness and increases the chances of loan rejection in the future. Getting a loan for business approved once you have defaulted on the loan repayment becomes difficult.

• Bankruptcy

A bankruptcy proceeding is the last resort for lenders to recover the outstanding business loan amount in the case of an unsecured loan for business. If you default on an unsecured loan, the lender may try to recover the loan amount by increasing the interest rate or charging a late fee. However, if you still fail to repay the loan, the lender may file for a bankruptcy proceeding in court to recover the amount.

Avail Of An Ideal Business Loan From IIFL Finance

IIFL Finance offers varying financial services, including customised and comprehensive business loans. Through IIFL Finance business loan, you can get instant funds up to Rs 30 lakh with a quick disbursal process online and minimal paperwork. The loan’s interest rate is attractive and affordable to ensure the repayment doesn’t create a financial burden. You can apply for the loan online or offline by visiting IIFL Finance nearest branch and verifying your KYC details.

FAQs:

Q.1: How much time does it take to approve the IIFL Finance business loan?
Ans: IIFL Finance business loan is approved within 30 minutes of application. Once approved, you will receive the loan amount in your bank account within 48 hours.

Q.2: What is the loan tenure for IIFL Finance business loan?
Ans: The loan tenure for an IIFL business loan up to Rs 30 lakh is five years.

Q.3: Do I need collateral to acquire a business loan from IIFL Finance?
Ans: No, IIFL Finance business loan does not require pledging any asset as collateral to take the business loan.