Unsecured business loans can come to your financial help whenever you need money to fund your business growth and development. Whether you want money to buy inventory, upgrade equipment, expand the workplace, market your company, or build working capital, you can apply for an online business loan and get the needed funds within minutes.
However, when you apply for a business loan, you need to understand its ins and outs too. Simply put, a business loan is a simple unsecured loan in which you borrow money from the lender and repay it over a set repayment term along with the interest amount.
However, have you ever thought about what would happen if you fail to repay your business loan and you default on its payments? Let’s look at the situation quickly.
What is an Unsecured Business Loan?
Unsecured business loans are the ones that you do not secure against assets. In the case of a secured loan, the lender recoups their loss by possessing your secured asset. However, with an unsecured business loan, there is no chance of this recourse. That is why unsecured loans usually have lower loan amounts with higher interest rates, preferably with shorter repayment tenures. Missing a single EMI does not indicate default.
A person defaults on a loan when they fail to pay their EMIs and cannot repay their debt. However, if you continually miss your EMI payments, do not make several payments in a row, or stop making EMI payments altogether, you run the risk of defaulting on your business loan.
Consequences of Defaulting
First of all, understand that missing a couple of EMIs does not mean you have defaulted. Often, you will only attract increased interest and late payment charges when you miss the first few missed or late payments. After missing three to six payments, you may have a risk of defaulting. Your lender’s first preference would be to adjust the loan terms to make payments more manageable for you.
They may reduce your payments or prolong your repayment term to increase your future payments likelihood. However, if you still cannot pay, they will take legal action against you to get the loan amount and interest payments along with the legal fees and charges. Since the legal costs can be hefty, it is in your best interest to avoid defaulting and keep paying as and when possible, even during a financial crunch.
Loan default also leaves a long-lasting blemish on your credit report, after which most lenders would not be ready to sanction you another loan. Since defaulting can make getting access to funds even more difficult for you in the future, avoiding default should be your topmost priority in any situation.
Tips to Avoid Loan Default
If you apply for business loan and you are finding it difficult to repay, you can follow these helpful tips to avoid defaulting:
- Negotiate with the Lender: Instead of going the legal way, their preference will be getting payment from you. With that aim, they will be ready to make some adjustments in your loan conditions to make them favourable for you. They may reduce your EMI amount, extend your repayment tenure, or pause your repayments temporarily, depending on your repayment history and individual circumstances.
- Talk to an Accountant: Missing loan EMI indicates issues in your cash flow or poor loan management. A qualified accountant can help you free cash from other business areas, which you can use to repay your loan EMIs.
- Make a Budget and Plan Your Finances: If you are indebted and managing EMI payments has become difficult for you, you need to look at your finances. Most importantly, you must make a budget and stay in control of your income and expenses.Go through the statements of the last few months and see where you are spending unnecessarily. Try to control those expenses and use the saved amount to make at least the minimum payments.
- Dig into Your Savings: While you are trying to avoid default, your first priority should be to repay your due amount. If you have built an emergency fund or you have some extra savings in your account, you may consider paying your due amount using them. You may build that fund later in a few months, but if you default on your loan now, getting back on track may become extremely difficult for you.
- Liquidate Your Investments: If you have invested your money somewhere, consider liquidating it to pay for your unsecured business loan. After all, you invest money so that it can come to your rescue in times of need. So, you cannot find a better time to use that amount than to avoid loan default.
Prevention is Better than Cure
Ultimately, using your business finances diligently is the best way to avoid defaulting on unsecured business loans. Sometimes, things do not happen the way you expect, and you may find yourself in a dire situation very quickly. However, you can avert a disaster using the above mentioned tips, get things back on track, and avoid default.
Be honest with your situation, talk to your lender, and try to reach an agreement that eases your loan repayment. Lenders avoid taking legal actions against their customers as much as possible. Ultimately, they also want to get their money back instead of dragging you into the court.
So, if you are looking for an unsecured business loan to finance your growth and development, apply for an online business loan at Clix Capital and be regular with its payments. Whenever you find it challenging to repay your EMIs, take the preventive steps and avoid default at all costs. We offer unsecured business loans of upto Rs. 50 lakhs with repayment tenure up to 12 to 36 months.