Business Loan

What Happens When Somebody Couldn’t Pay Off a Business Loan?


As a small business owner, you know what it takes to build a company from the ground up. You may have encountered many difficulties while building your firm. Lack of operating cash is one of the major issues that most small company owners like you deal with.

To run day-to-day company operations, money must come in. This is the reason why entrepreneurs like you decide to get a small business loan. These loans are offered to aid small business owners in establishing, growing, and expanding their enterprises.

Many small business owners are concerned about defaulting on their loans. It is crucial to understand “what happens when you fail on a business loan.

What is a business loan?

A business loan is a financial instrument. It generates funds and meets the company’s investment needs. The firm’s owner applies for a business loan from a bank. The amount of the loan and the interest rate are fixed.

After accepting the loan, the borrower handles paying the lender the principal sum. You may repay using various options, including EMIs, part payments, lump-sum payments, etc.

Why are business loans important for a company?

Business loans have become one of the most popular leveraged financial solutions. It is for business owners wishing to invest in their companies without spending money. There are no limitations on the ultimate use of the loan amount collected. The loan amount provided by the loan for company may provide a slew of benefits to business owners.

You may use the loan proceeds to buy goods, hardware, and real estate. Or, you may use the loan to invest in equipment and machines. 

As a result, a loan may meet all a company’s capital needs. Yet, some business owners fear that loans hinder their ability to buy equipment and machines.

What Happens If I Don’t Repay a Business Loan?

Even company owners with the best of intentions may quickly fall behind on repayments and ultimately fail on a small business loan. If you are wondering what will happen if you default on a business loan, look at the following points:

  • The lender will make efforts to collect- A lender will attempt to collect the business loan through all communication methods, including letters, emails, and phone calls. 
  • The credit bureaus will be notified of the default- By default, both your personal and corporate credit ratings will be harmed. Since the documentation required to record an unusual, one-time late payment is not worth their effort, lenders seldom do so. However, they’ll notify the credit bureaus if you don’t pay after a few months. 
  • Personal Promises and Security- If you obtained a secured business loan, your lender would have the authority to take possession of the pledged collateral. Sometimes the equipment that serves as security is bought with a loan. 
  • Possible request for you to sign a confession of judgment- You give up the right to represent yourself in court when you sign a confession of judgement (COJ). The lender may have the ability to freeze your account and other assets once it has been notarised. Lenders are requesting that borrowers sign these letters in advance. Lending to a small company carries risk, especially if it’s an unsecured loan. Confessions of judgement protect the lender. In this letter, the parties anticipate their future course of action if the borrower fails.

Steps to Repay a Business Loan

You must have had a good reason for delaying your business loan payment for a while. 

Whatever the cause, if you’re having trouble making your payments, you may want to think about one of these numerous alternatives:

Postpone Your Payments

You might request an EMI vacation for a few months after informing the bank of your temporary incapacity to make payments. This circumstance may arise during a job move or a brief lack of clients or workers. Banks may recognise these as valid justifications but still, charge deferral fees.

Lower your EMI

Consider getting the monthly expense decreased if you are having trouble paying the EMI amount. You may speak with the lending company and ask them to extend your loan’s term. This will lower your monthly EMI payment, but you could end up paying more in interest. You should raise the EMI amount after your financial situation has stabilised.

Loan Restructuring

A borrower may ask the lender to reduce the loan’s terms and conditions if he or she cannot uphold them. This might result in fewer fees, a lower interest rate, a longer loan term, an interest-free period, etc.

Single-event Settlement

This option is often used whenever a borrower cannot repay a business loan because the interest accumulated is more than the principal. At this point, the lender would have designated the loan as a non-performing asset (NPA). The borrower may be insolvent or unable to make any further payments. He could be given the option to repay the debt with a minimal payment. Recently, a bank made a settlement offer to its non-performing assets (NPAs) in education loans, waiving up to 90% of the principal and 100% of the interest. However, if you accept this offer, proceed with care since it may impact your credit score, and your credit record will show that you could not repay your loan in full.


Utilising a business loan might assist you in starting and growing your company. But it’s crucial to make your loan repayments on schedule. Failure to do so might have a negative impact.

Before accepting the loan, inquire with the lender about how they handle late payments and what happens if you cannot make any payments.

For more blogs on business loans, check out Piramal Finance and explore their products and services.