SME financing is an unsecured loan that comes without any collateral. As a borrower, you don’t have to provide an asset against which the loan will be sanctioned. Lenders don’t attach a limit of usage for disbursing these loans. This allows you as the borrower to utilise them just as per your necessities, expanding the business to another location, purchasing plant & machinery, or even consolidating debt.
These are just some of the reasons to get small business loans for smooth financing. However, market instability and unpredictability can push a business into deep financial losses. This can lead you to default on the SME loan. Although you don’t risk losing any asset, this does not necessarily mean you’re liable to default the loan without consequences.
That said, such situations are farfetched and can only take place in very rare cases.
Here are a few ways to make the best of SME financing:
1.Extend the loan tenure
You can ask your lender to extend the tenure of your business loan. This will lead to a reduction in your loan EMIs considerably. Thus, your monthly instalments become affordable, and you can repay your loan more easily.
2.Apply for a deferred payment
Deferred payment is an arrangement where the lender allows you to pay the loan at a later date. It is a temporary rescheduling of your loan EMIs in case you are unable to pay.
3.Convert the loan into a secured loan
You can convert your unsecured small business loan into a secured loan to avoid a default. By offering an asset as collateral to your lender, you can reduce your rate of interest as well as extend the loan tenure.
However, you need to ensure that you can repay the SME financing. Failure to do so will lead to the lender seizing your asset and liquidating it.
They can do either of the following:
●Seize a movable asset (vehicle)
In case you have hypothecated a movable asset, then the lender will give you a notice period of 7 to 15 before repossessing it. If you fail to pay your SME financing loan dues within this date, they will repossess the asset and give you a pre-sale notice of 7 days. If you still fail to pay the outstanding amount within this time, then the lender will sell the collateral in an auction.
●Seize an immovable asset (house)
Similar to the above, the financial institution will give you 60 days’ notice period before possessing your asset. If you fail to repay the outstanding amount, then they will seize the property and give you another 30 days for repayment. If you still fail to repay, the lender will liquidate the asset.
4.Opt for a one-time settlement
If one of your EMIs remains overdue for more than 90 days, then the loan is considered a non-performing asset (NPA). The RBI states that all financial institution must provide the option of one-time settlement to borrowers with NPAs.
With a one-time settlement, you have to pay between 25% and 100% of your outstanding loan amount depending on the situation. Repaying the amount will settle the loan once and for all.
5.Restructure that loan
You can ask your lender to restructure the SME financing terms in case you are having difficulty repaying it. With the restructuring, the financial institution may either lower the interest rate or temporarily relieve you from paying any of your loan EMIs.
All of these methods mentioned above can affect your credit rating, just why you need to keep an eye on your credit score. Hence, it is recommended to plan your loan accurately and from a renowned financial institution.
Bajaj Finserv is a trustworthy lender offering a hassle-free loan application process. They also required eligibility for MSME loan. Existing customers can also avail pre-approved offers with such loans. These offers additionally come with personal loans, home loans, and other financial products as well as services.