With economic activity coming to a standstill in the wake of the global pandemic, most businesses, especially SMEs are reeling under the weight of growing debt. Companies are facing a difficult choice of whether to keep their business afloat using whatever reserves they have, or use it to pay off the loan and risk closure.
The situation is tough indeed, but then, nobody ever said that running a business is easy! Whether you have missed your EMI payment or wondering how to pay back business loans without losing all your money, here are some common measures that you can take to salvage the situation. This way, you won’t have to file for bankruptcy.
Cut unnecessary costs to free up cash
Revisit your expenditures and ditch unnecessary ones like software subscription, expensive systems and also office space, if you’re paying rent. Shift to working from home. If you have outstanding payments due from customers, ramp up your collection efforts and sell any unused or old equipment/scrap etc. This should free up some cash, so you can use the same to repay business loans.
Prioritize debt payments
As a business, you probably have multiple debts like bills to pay, loans to be paid off, credit card bills, office expenditure etc. Prioritize. Focus on paying off debts with high interest rates first, such as credit card bills, followed by any
secured loans. Paying off creditors etc. can free up your assets too. Take the advice of your accountant if you have one, but sorting out your finances is critical at a time when your sales are dwindling. You can even consider taking a
consolidated loan to pay off small existing ones (refinancing). More on this in the later section.
Talk to your lender
This point cannot be emphasized enough. However, it is imperative that you talk to your lender and inform them about your condition. Explain your financial situation and what measures you are taking to manage the situation at hand. Be honest and forthcoming about your issues. Ask the lender about various possibilities. Lenders are generally accommodating. For example, the current COVID-19 crisis saw many
financial institutions issuing moratorium of three months or so on loan repayments.
Loan restructuring
Simply put, debt restructuring means revising the terms of your existing loan by reducing the rates of
interest on business loan or extending the repayment tenure to ease the financial burden. That way,
your EMIs will come down and it will be easier for you to manage your monthly payments. Again, it’s important to talk to your lender about the provision, which will take you back to the previous point.
Loan rescheduling
Loan rescheduling is similar to restructuring as it involves extending the tenure by allowing some grace period to the borrower. Or, the tenure can be extended by lowering the interest or adding more number of instalments to reduce the monthly EMI amount. In most cases, the interest rate remains the same here.
Refinance
Refinance is good option to repay business loans if the debt is costing you a lot in terms of interest payments, or if you feel it’s risky to continue, or you have multiple small debts. It’s always better to take another loan from a different lender, if available at better rates and at better terms, to pay off all existing debts. It is a good idea in certain cases as there will be just one loan and a single EMI to worry about, rather than multiple EMIs. It will be easier for you to track as well.
Maintain an emergency reserve
Running a business involves a lot of uncertainty. Even if it is doing well today, there is no guarantee that it will continue to do so in the coming month. As a result, it is advisable that you set aside a certain amount of your profit each month and put it in a cash reserve. Such reserves come in handy during a crisis and aid in the repayment of business loans, the payment of employee salaries, and the continuation of business operations.
Sell obsolete assets
If you own a manufacturing plant or a factory, you are likely to have many pieces of equipment that have become obsolete over time. Since the purchase price of such assets is worthwhile, even if it has depreciated significantly, selling them can still provide you with a good sum of money.
The amount you get from such a transaction can help you in making timely
EMI payments.
Loan Settlement
A loan settlement is another great way to repay a business loan. In this case, the lender allows you to pay a much lower amount than the actual outstanding amount. However, loan settlement has a number of negative consequences and can significantly harm your credit score. Furthermore, the
business loan settlement is recorded on your credit report and will remain there for a good number of years, reducing your future borrowing capacity.
In the
event of a default, the lender can resort to legal actions or exercise recovery measures to recover the amount. However, no lender wants to resort to extreme measures unless that is the last option, and instead works with the borrower to arrive at an amicable situation, which serves the interest of both parties.
Disclaimer: This post was first published on 12th May 2020 and has been updated for the latest information, freshness, and accuracy. 
