As an entrepreneur, you know ups and downs in business are common.
You can’t always be sure what your cash inflow will be from one month to the next, but your overhead costs remain constant. In such instances, you may not be able to pay your EMIs on time, whether they’re for a business loan or a credit card. But what is the difference between a bill past its due and a default on a business loan? And can you get another business loan if you’ve defaulted on a business loan in the past? Let’s figure it out.
What does it mean to default on a business loan?
Defaulting on a business loan (or a credit card account) happens when you are unable to pay more than 3 EMI instalments one after another.
There are a few types of defaults on a business loan, and these have different effects on your ability to raise formal funding in the future:
- You defaulted on a loan, and you never paid it off.
- You defaulted and paid, but your payment was delayed.
- You defaulted and settled with your lender (for a certain amount or a loan write-off).
In addition to the type of default, the intent of the action also matters. When you apply for a business loan and have defaulted in the past, lenders investigate your intent behind the default – you had the money but chose not to repay the lender, or you were unable to meet your financial obligations because you did not have the cash.
How does defaulting impact my business loan prospects?
The different types of business loan defaults have different effects on your future ability to get a business loan.
1. Defaulted and never paid it off:
It will be difficult to find a lender willing to lend to you because your financial behaviour in the past makes you seem like an unreliable borrower.
2. Defaulted and settled with the lender:
If you defaulted in the past, and you reached a settlement with the lender for your dues (anything above Rs. 12,000), or your debt was written off, it will be tricky but not impossible to borrow from another formal lender.
3. Defaulted on a low-value amount or credit card account:
If the amount you defaulted on is around Rs. 10,000 or less, or it was credit card debt, you may still be able to get a business loan from a formal lender if you meet all the other loan eligibility criteria.
4. Defaulted during 2007 – 2009:
If you defaulted on a business loan during 2007 – 2009 and reached a settlement with your lender, and you have a NOC (No Objection Certificate) from them, you can get a business loan from another formal lender. This is because the global economy underwent a recession during those years, and SMEs across the world, not just in India, had a difficult time financially. Therefore, many of them ended up reaching settlements with their lenders.
It has also been over a decade since the most recent recession; therefore, lenders will assume your business financials and financial history has evolved since then and you may be able to find a lender who is willing to lend to you if you meet all the other loan eligibility criteria.
5. Defaulted on one loan from the multiple credit facilities you are using:
If you have multiple live loans that you are currently paying off and are successfully paying your EMIs for almost all of them but have defaulted on one – usually a credit card – then lenders consider such businesses on a case-by-case basis.
Lenders will take into account your current business conditions, how much money you owe, your credit capacity, and a few other factors before making their final lending decision as you continue to repay your high-value loans.
What influences the lender’s decision if I defaulted on a business loan in the past?
If you’ve defaulted on a business loan in the past, lenders will consider the following before deciding to approve or deny your business loan request:
1. Your live loans:
This may be one of the most important factors lenders look out for – whether you have any current live loans. If you do, it means after your default, at least one lender considered your profile strong enough, despite the default, to lend to you.
2. Your current EMI payment track record:
This is to ensure that you’re successfully meeting your live loans obligations according to the loan contract.
3. A NOC from your previous lender:
If you’ve defaulted and settled in the past, the lender will need a NOC from that lender to ensure you did in fact settle and that you don’t have any pending dues with them anymore.
4. Your current financials:
Lenders will thoroughly review your financials to ensure your business is strong enough. This includes analysing your cash flows, balance sheets, bank account statements, and other financial documents to be certain your business isn’t in a cash crunch and you won’t default on the business loan you borrow from them.
How can I avoid defaulting on my business loans?
- Always maintain a minimum bank account balance that is higher than your EMI amount.
- Communicate with the lender if you know meeting your EMI obligations may be difficult that month.
- Set automatic reminders to remind you when your EMIs are due. This is a prompt to not only pay them but also move the necessary funds into the correct account to ensure your automatic EMI pull does not bounce.
CreditEnable Tip: If your lender offers the Electronic Clearing Service (ECS) to automatically withdraw your EMI instalments from your bank account, that pull happens early in the morning on the day your EMI is due. So, remember to move the funding into the account at least one day before the EMI due date
If you have recently defaulted on a business loan and are worried about the consequences of the default, read this post.
If you’re looking for a zero-stress SME loan and have not defaulted on a loan in the past, use CreditEnable’s technology platform to find the right business funding to help you grow!
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