What Happens When You Default On A Business Loan & How To Avoid It?

Read out the article that elaborates on what happens when you default on a business loan and how can you avoid the risk. Check out the blog at IIFL Finance.

23 Sep,2022 11:55 IST 14 views
What Happens When You Default On A Business Loan & How To Avoid It?

A loan default leads to a poor credit score and puts you on the radar for future credit activities. No entrepreneur would want to default on their business loan, ever. However, there might be unavoidable circumstances that can lead to this default.

This article elaborates on what happens when you default on a business loan and how you can avoid it.

What Is Loan Default?

Loan default is when the borrower violates the specified terms of the loan agreement, usually when the borrower does not pay the agreed installments. It leads the lender to take legal action against the borrower.

What Happens If You Default On A Business Loan?

For every missed ball, there’s always a consequence. Similarly, there is an impact on defaulting on a business loan. The business loan default consequences include:

1. A Decline In Credit Score:

Every time you miss paying your monthly installment, your lender reports you to the credit agency, which leads to a drop in your credit score. It can jeopardize your future credit-taking opportunities.

2. Higher Interest Rate:

A downgrade in credit rating can result in higher interest rates or exorbitant late fees, depending on the business loan agreement. This amount affects current loan repayments and future loan approvals.

3. The Problem In Getting Future Loans:

A loan default combined with downgraded credit can hinder your chances of getting a favorable loan later.

4. Legal Actions:

In a secured loan, foreclosure gives the lender complete control over all assets and property listed as collateral in the loan agreement. Generally, they sell collateral at private or public auctions to recoup losses. For unsecured loans, lenders typically charge late fees. But even for unsecured loans, lenders require a personal guarantee or mortgage over your business assets. Therefore, if the failure continues, the lender can take legal action against your company.

How To Avoid Defaulting On A Business Loan?

Some of the basic things you can keep in mind to refrain from a business loan default are-

• Maintain sufficient balance in your bank account. Ideally, you should keep at least three months’ worth of reserve in your account
• Keep a check on due dates to ensure balance in your account
• Try refinancing in times of need
• You can communicate with your lender to reduce your EMI or extend your term or for revising your interest rate
• Keep a check on your expenses and prioritize debt repayment

Apply For Business Loans With IIFL Finance

IIFL Finance is a leading instant business loan provider. We provide quick loans for small businesses with small financial requirements up to INR 30 lakh with simple eligibility requirements. You can check the interest rate at your nearest IIFL Finance branch or online.

The entire process, from application to disbursement, is 100% online, with disbursals under 24-48 hours. Apply for an IIFL Finance business loan today!

Frequently Asked Questions

Q.1 How is your credit score affected in case of business loan default?
Ans: A business loan default leads to your lender reporting you to the credit agency, consequently declining your credit score. It can jeopardize your future credit-taking opportunities.

Q.2 Can I apply for another business loan after defaulting on my previous loan?
Ans. You are eligible for a business loan if you possess a track record of completing your EMI payments on time. Therefore, ensure you have paid off any existing loans before applying for another one to increase your chances of approval.

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