Only those who have not ventured to startup a business would not realize how difficult it is to get loan. However, you may soon find out that the rigors to get loan approval is a lot easier than paying back the loan if you never had a repayment plan in the first instance. Defaulting in paying back with a loan comes with a number of consequences which you will soon find out.
You can lose your collateral
Traditional financiers like the commercial banks would always require that the loan they give out be insured by collateral from the borrower. If the borrower ever fails to pay back the loan, the bank will auction the property of the borrower in their position to get back their money. Commercial banks would be pleased if their borrowers default, right?
The lender can sue you for compensation
Other loan financiers that do not require collaterals may decide to sue you. The story gets really interesting here because you will be demanded to pay back the loan borrowed in the court plus the interest. Added to that, you will need to pay the lender compensation for the inconveniences plus several other fees that would be demanded of you.
The credit score of your business would be in total jeopardy
The credit score of your business will experience a leap each time you take loans from funding houses. Credit score is a testament of the integrity of the business in the eyes of every staff of the funding house. The moment you begin to default in paying back your debt in a timely manner, your score will begin to slide back.
Avoiding loan pitfall in a business is easy
If your business integrity means anything to you, then you must understand how important it is to clear your loans on time. There are various ways you can make your loan less a burden and they are listed below;
1. Have a repayment plan before taking the loan
A popular maxim says that failure to plan is planning to fail. Before you take up any loan, make projections on how much the loan can impact on your business, the increased revenue it will generate and the amount of this newly generated revenue that will go into paying back the loan.
2. Effective communication can change everything
Many business owners – particularly the small businesses – will begin to play hide and seek the moment they default in paying back the loan they took. Another maxim said that honesty is the best policy. Be honest enough to call up your lender and try to renegotiate the terms of the loan. It will definitely help you to reduce the damage defaulting would have caused your business.
3. Be prudent in reading the terms of the contract
The ecstasy of finally getting loan makes some borrowers wave aside the terms. Only take loans that have terms that are favorable to you. Avoid loans that peg their interest rate very high, particularly those that have double digit interest rate.
Working with a financial advisor will help you avoid bad loans
Some of the terrible situations borrowers find themselves in can be avoided if they had hired a financial advisor. Financial advisors will assess your business and the loan you want to take up and let you know if the loan will be beneficial or harmful to your business in the long run. Many of such financial advisers can be contacted online.
- Financing a small business is a great challenge to every entrepreneur.
- There are dire consequences for defaulting in paying back a loan.
- You can be sued for compensation.
- The credit score of your business would receive a devastating blow for defaulting.
- Having an initial payment plan will help you not to default.
- Communicate with your lender and renegotiate terms.
- Don’t be in a haste to take up loans without going through the terms prudently.
- Build trust with the financial house you want to take up loans.
- Working with a financial advisor can help you avoid bad loans.
- Banks will auction the collateral of the business to regain their money.
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