Business Loan Challenges: What to Do if Your Business Shuts Down

Many times, MSME owners run into unforeseen problems like market downturns, loss of customers, or increasing costs which can be causes of Business Loan Challenges. Such issues sometimes lead to the ending of their business. If you have taken an instant business loan and had to shut down your business, it creates a big challenge. What happens to the loan? How will you close it?

Here, we shall discuss loan default, its consequences, and what you may do in such situations.

What is Loan Default?

A business loan default happens when a borrower of a bank or any NBFCs fails to pay back the loan amount, as agreed with the financial institutions. For business loans, repayments normally occur monthly which is known as Monthly EMI. Any missed payment installment can be considered by the lender as a “missed payment”, but repeated missed payments or the total inability to repay the loan will lead to a loan default.

Most of the MSME business owners may shut down their business due to lack of finances or their business is running in losses. When a business fails to make enough money, it becomes challenging to maintain the business and clear debts, such as business loans.

Consequences of Loan Default

1. Damage to Credit Score: Being a default means a negative mark against the credit score of the borrower. Although it was borrowed in the business name or individually under the owner’s name, the default shows up on the credit report. A low credit score doesn’t make it easier to get loans for personal needs or business requirements.

2. Legal Action: The lender can rais a complaint against you and your business if the loan is not repaid. This might affect you and your business goodwill.

3. Collateral Seizure: If your business loan was secured by collateral, such as property, equipment, or inventory, then the lender has every right to acquire them and sell, to recover the loan amount.

4. Impact on Future Borrowing: Once you default on a loan, it becomes very hard to gain loans in the future. Even if a lender is willing to give you a loan, the interest rates are likely to be much higher because of the high risk involved.

5. Stress and Mental Pressure: Financial issues can be a very stressful and psychologically demanding process. Asset threats, legal threats, and the general issue of daily expenses can put so much pressure on your overall well-being.

ALSO READ: Home Loan Prepayments Reduce EMI or Tenure

What to Do if Your Business Shuts Down

1. Communicate with Your Lender: Inform your lender about your situation, and tell him the truth. Ask the lender if there is a possibility he can do it for you. The possible options which have been set are the restructuring of the loan, reduction of the monthly installment, or the repayment period. This communication may sometimes save serious results such as getting sued in court.

2. Legal Action: In case the loan isn’t repaid, the lender can sue the business owner of the MSME. Most business loans demand personal guarantee or collateral, like machinery, inventory, property, etc. This allows the lender to recover the amount from your personal assets or business assets in case you shut shop. If you fail to pay for the borrowed amount, then a lawsuit can be filed by your lender in court for recovery.

3. Taking of collateral: If your business loan was collateral-based, such as by property or equipment or even inventory, the lender can take and sell the collateral used to secure the loans to recover the amount. The loss of such valuable assets compounds the challenge of bouncing back from this financial blow.

4. Impact on Future Borrowing: Defaulting on a loan is very difficult to recover from as the moment someone defaults on the loan, he faces pretty bad times getting loans in the future. Even if a lender would like to lend you money, that money will have to be borrowed at much higher interest rates because of the risk.

5. Stress and Mental Pressure: Financial pressure can be quite stressful and mentally demanding. Asset threats, legal threats, and the general issue of daily expenses can put so much pressure on your overall well-being.

6. Approach a Financial Advisor: In case the situation turns too hot to handle, take the situation to a financial advisor or debt counselor. They will give professional advice on how to manage one’s debts, negotiate with lenders, and formulate a recovery plan.

7. Bankruptcy as a Last Resort: When the loan cannot be repaid, then bankruptcy might be an option. Laws on bankruptcy differ differently in regions, but they generally provide the avenue where individuals or companies can afford either restructuring or release of debts. This normally carries long-term implications but allows one to start over.

Conclusion

A loan default can lead to significant consequences such as bad credit ratings, acquiring personal or business assets, and legal problems. However, it is still possible to manage the situation effectively by taking proactive measures such as communicating with lenders, restructuring the loan, or seeking professional help. Therefore, learning from the experience and planning carefully will give them the opportunity to restart their business in the future.

NBFCs can be a great option for unsecured business loans for the MSME sector. Most NBFCs provide flexible loan options, faster turnaround, and less paperwork compared to traditional banks. Because of this, they become ideal choices for small businesses. Their customized solutions and flexible policies help MSMEs during difficult times to sustain and grow their MSMEs.

While loan default can feel overwhelming, it is important to remember that it is not the end of the road. Many successful businesses have faced financial setbacks and emerged stronger through resilience and strategic planning. Building a contingency plan, focusing on generating alternative revenue streams, and improving financial literacy can help prevent future defaults. Additionally, staying informed about rights and options as a borrower can provide a clearer path to recovery and growth. It is important to remember that it is not the end of the road, as challenges often pave the way for valuable lessons and future opportunities.

Disclaimer: This is a guest post and we are not liable for the links to the external websites present in this article.

Get EARLY Retirement!

Use Retirement Excel Calculator that will help you to Retire Early.
Click below button to download Retirement Calculator in Excel:

Watch how Retirement Calculator in Excel Works

Income Tax Calculator App – FinCalC

For Income Tax Calculation on your mobile device, you can Download my Android App “FinCalC” which I have developed for you to make your income tax calculation easy.

What you can do with this mobile App?

Calculate Income Tax for new FY 2024-25 and previous FY 2023-24
Enter estimated Investments to check income tax with Old and New Tax Regime
Save income tax details and track regularly
Know how much to invest more to save income tax
More calculators including PPF, SIP returns, Savings account interest and lot more

Download Income Tax Calculator APP from play store

Use Popular Calculators:

I’d love to hear from you if you have any queries about Personal Finance and Money Management.

JOIN Telegram Group and stay updated with latest Personal Finance News and Topics.

Download our Free Android App – FinCalC to Calculate Income Tax and Interest on various small Saving Schemes in India including PPF, NSC, SIP and lot more.

Follow the Blog and Subscribe to YouTube Channel to stay updated about Personal Finance and Money Management topics.