Financing your business is no small feat – it can be a long and tricky process to navigate. It is also a necessary component of the budding Indian enterprises since small businesses depend largely on borrowing money to grow. But this dependence on financing does not come without creating a possibility for small businesses to fall into financial hardship and default on their loans. You may sketch the best possible plan for your business to make a profit & to repay the loan as soon as possible. However, there are many variables such as a sudden decline in sales, miscalculations, and more recently, lockdowns due to Covid that pop their heads at the wrong time. As a result, this may cause you to default on your business loan. The consequences can vary and may affect various aspects of your business including your credit score. Let us see in detail what they are:
Your credit score would start dwindling
As you might already know, all the critical company information, including every financial transaction related to your credit account, is reported to the credit agencies, including your defaults in payment. Consequently, your credit score takes the blow every time you fail to pay on time.
You may be denied a loan
Every lender considers your credit score before granting you a loan. A steep fall in your business credit score will obviously create hindrances for approvals on future loans.
Your personal credit score will get affected
In case you are the sole proprietor of your business or you were the personal guarantor to the loan that was defaulted, it hits your personal and your business credit score, both!
You will get a loan but at a higher interest rate
According to your business loan agreement, a business loan default can lead to an increase in your rates of interest, and you might have to shell out a steep late fine.
You will have to liquidate your assets
If you are unable to pay your dues, you could choose to sell a business asset that’s not essential to the running of the company to arrange a booster of working capital so it can continue to trade. The act of selling that asset and turning it into cash is called ‘liquidating’ the asset. The assets can include everything from plant and machinery to property, vehicles and fixtures, and fittings. If you had taken a secured business loan against collaterals, the lending financial institute might sell the assets you had provided as collateral to foreclose the mortgage.
Your lender could take legal action against you
In most cases, the lender would charge a heavy penalty against you for not repaying his loans. But in case the amount is large and the default is serious, they might file a lawsuit against you as the business owner.
You will have to file for bankruptcy
In the case of legal intervention, you will be obliged to repay the loan as per the terms dictated by the court. However, if you still fail to repay the loan amount, you will have to file for bankruptcy as a last resort.
How does CRIF help you in this? Well, at CRIF, you can get your credit check done instantly, online, in real-time. We get your Credit Score online and provide a free Credit Health Analysis of your CRIF report. Based on the analysis, we help you discover loans and credit cards best suited for your credit profile. We help you understand your Credit Profile, Credit Information Report (CIR) and know where you stand.