4 Tips to Prevent Defaulting on Your Business Loan

Defaulting on a loan is a serious breach of trust and you could be liable for penalties, not to mention, loss of your assets. It can be easy to make sure that you never do; all you need to do is follow these 4 simple tips to prevent loan default

1. Get a comprehensive idea on the terms and conditions

Before you rush to a lender for business funding, understand the prevalent terms and conditions in the market, as well as those that your shortlisted lender lays before you.

Take the help of an expert to ensure you are clear about every aspect. Read the fine print as you do not want ugly surprises being sprung upon you later.

Pay special attention to the interest rates, repayment terms and refinancing options, should you wish you change your rates or payment schedule later.

Make sure you ask about pre-payment penalties or fines in case of any delay or part-repayment.

If you decide to go for a secured loan, learn to negotiate better terms.

2. Refinance

If the business loan suddenly seems to be a burden, you can ask the lender for a refinancing option.

When you refinance your existing loan, you can ask for better (lower) interest rates if the market is in the favour of borrowers. If you prefer, you can alsoask for a change in the payment schedule or terms of your existing debt. You can increase (or decrease) the repayment amount or increase (or decrease) the frequency of your repayment.

Loan refinancing works both ways. Besides making the loan burden easier to bear, you can also take advantage of a sudden influx of money or an improved business situation to get better financing.

3. Prioritise debts

A business needs to spend money to make money. However, in this quest of making more money, don’t neglect business debts. Start every month by taking stock of what you owe to whom and clear that before spending your money on other necessities.

It is possible that you might have more than one type of business funding invested in your business. Always give the topmost priority to your oldest debt. In case of any inability to pay your loan, this lender has first dibs on your assets.

Is your loan collateral free or is it a secured loan? The latter is tied back to your assets or your business. It is imperative to make repayments to secured loans on time to avoid seizure.

Unsecured loans, like credit card are relatively less important. We do not advice not paying them. There are consequences to not paying those bills, but at least non-payment will not interfere in the operations of your business.

Your rent and utility bills are also ‘debt’. Clear your dues every month, month-after-month, and you will be able to enjoy these services without interruption, letting your business flourish.

4. Exercise cost controls

Like we’ve said earlier in the article, you need to spend money to make money. However, you need to exercise control over your spends.

Check that the money you are spending on necessities, like utilities or raw material, is not more than you need to. Is there a way that you can cut down costs without cutting down on the requirement?

Even if you’ve taken the business loan to spur business growth, make sure that you do not spend too much, too soon. Have a plan and find ways to cut costs.

Originally published on SME Times India

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