What Happens To Business Loan If Business Isn't Working

Business loan can be helpful for a business to run their business efficiently. Read to know what happen to a business loan if your business is not working.

15 Nov,2022 13:00 IST 136
What Happens To Business Loan If Business Isn't Working

Success and failure are inevitable in business entities. The need for capital is the common denominator between both outcomes. A solid financial flow helps keep everyday operations in check. Business owners rely on their savings or switch to business loans to satisfy their monetary requirements. These loans help tackle immediate capital crunches. They also provide flexible repayment options and competitive interest rates.

While business loans are a secure remedy, they can become a financial burden if you default on payments. But what happens to your business loan in case your business fails?

How Do Lenders Deal With Faulty Business Loans?

Lenders offer secured and unsecured business loans. Where unsecured loans do not have collateral supporting them, secured loans have financial assets like jewellery, property, or any precious tangible asset, and other assets as collateral.

With a secured loan, the lender can recoup the outstanding amount (principal+ interest) by auctioning the collateralised assets. Depending on the specifics of your loan agreement, the lender can seize any assets you pledged as collateral to recover the losses accrued on the business loan.

Your lender can drag you to court for an unsecured business loan by filing a case against your firm. Though no collateral is involved in unsecured loans, the financial institution can still hold you accountable for missing loan repayment. The lender has the legal right to recover the total loan amount, interest, fines, fees, and other expenses involved in the collection process.

Additionally, if your unsecured business loan carries a personal guarantee at the time of loan sanction, your lender can seize your assets to cover any shortfall.

Steps To Manage Your Business Loan When The Business Fails

• You can request the lender to defer payment. Under this arrangement, the borrower can delay the loan payment without attracting interest. It gives you extra time to bring their business operations back in line.
• Reduce your EMI amount to minimise the loan burden. However, this will increase your loan tenure and interest payments.
• You can request the lender for loan restructuring. For example, they can reduce the interest rate, extend the moratorium period for repayment, etc.
• You can choose the One-time settlement or OTS option to manage your business loan during unfavourable conditions. According to RBI norms, the lender must provide OTS to the borrower when a business loan falls into the NPA category. The OTS requires the borrower to settle the loan by paying 25% to 100% of the outstanding balance in a single instalment.

Business loans quickly gained momentum in the financial market to keep operations running smoothly. However, you must handle them carefully to prevent unfavourable outcomes, especially when your business fails to operate well. You can consider the solutions above to manage business loans.


Q1. What are the minimum and maximum tenures for business loans?
Ans. Financial institutions provide business loans to customers for a period ranging from 12 months to 60 months.

Q2. What are the essential documents needed for business loans?
Ans. The list includes the following documents:
• ID proof like Aadhar card, PAN card
• Address proof
• Bank statement
• ITR copies
• Chartered Accountant verified Profit & Loss statement and Balance Sheet

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