Ups and downs in business are inevitable and one has to effectively deal with them. The business can lose but it should not shut down. However, a loss has a profound impact on an SME or a new business. The pain can be deeper if the business facing loss has availed unsecured business finance and has been forced to default on the repayment.

Accepting the harsh reality that profit and loss are both parts of the game, one must be aware of the consequences of defaulting on a business loan in case of a loss-making scenario.  In a situation, when the lender is an NBFC, the situation has to be tackled carefully. Most Fintech companies stick to the terms and conditions stipulated at the time of loan grant. While it may be quite a challenge to convince the professional, institutional lender, it is still possible to minimize the adverse impact by negotiation and strategy.

Initially, in case of defaulting on EMI payments for a few subsequent months, the lender in anticipation of the business loan turning into a non -performing assets may initiate steps to ensure the realization of loan amounts. This may entail insistence by the lender to make regular payments.

If the initial step fails and the business loan turns delinquent, the NBFC will ultimately resort to recovery.

In spite of being a defaulter, the business owner is entitled to certain rights, which can be exercised at that point in time. Hence complete knowledge of the terms and conditions of the loan agreement and the relevant law are crucial. The best way forward would be to initiate remedial steps as follows with the lender before any extreme actions are taken.

How to tackle a business loan liability, when the business is in the red?

Postpone Payment:

Deferring the payment of the loan involves delaying payment of the loan, subject to certain conditions, whereby interest does not accrue on the outstanding dues. A defaulter can negotiate with the NBFC for a favorable repayment schedule, so as to buy time and repay the dues once the business turns profitable again.

Reduction of EMI:

This is the most obvious method to ease the loan burden. However, reducing the EMI will automatically extend the loan tenure. The other hidden cost involved is that due to a longer period, the borrowing costs have also invariably risen. However, this step helps to overcome immediate financial difficulty. The lenders may prefer this option as they are able to derive higher repayment amounts than under the initial arrangement.

Loan restructuring:

This involves a relaxation in the terms and conditions stipulated in the original loan agreement. If the lender complies to the borrower’s request, this may result in a reduction of interest rates, waiver on interest amount, moratorium period etc. This way the business loan is turned more favorable and the borrower can repay the loan. However, this may be extended to a regular customer of the NBFC lender.

One-time settlement:

This is as per an RBI directive, whereby a one – time settlement or OTS can be adopted, in case a business loan turns NPA. Under this, the lender offers the OTS provision to the borrower. The borrower pays 25 to 100 of the outstanding liability at a time and settles the loan.  The disadvantage of the OTS arrangements is that it eats into the profitability of the lender. This may be granted to SMEs subject to fulfilling the RBI criteria.

Ever greening

This is when the borrower negotiates with the lender and assumesa new business loans in return for closing the existing business loan. This is often a win-win situation for both the borrower and the lender.

In the worst-case scenario of being unable to service the business loan, the lender may take legal action to recover the loan amount and the outstanding interest. However, no lender would initiate legal proceedings without first talking to the borrower to rectify the situation. The borrower must honestly and transparently communicate the challenges and the business situation to the lender while showing a genuine commitment to repay the loan amount.

The last thing one must do is to ignore correspondence from the lender and refusing to talk to the NBFC agents. This can result in the bankruptcy of the business as well as of the business owner. Hence one must ensure prompt repayment of unsecured business finance and avail the loan amounts after considering the business risks involved. In case of a business loan, better to be safe than sorry.