When you run a business, it is likely that there will be a time when you will benefit from a bit of extra financial help, whether you’re looking to grow, hire more staff, or diversify. There is a range of loans that you could choose to help your company become a success. It is essential that you choose a loan and a lender that offers the correct terms and conditions for your income – if you struggle to make repayments, you could end up defaulting. Below, we’ll take a look at how you can stop your loan from defaulting and plunging you into financial difficulty.
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What does it mean for your loan to default?
If you’ve taken out a business loan, or any loan from a lender in the past, you will be required to make repayments of a certain amount over an agreed amount of time so that the lender can make back the money that you’ve borrowed. Sometimes, things change from when you decided to take out the loan – maybe your business has suffered a loss of income, or you’ve fallen on hard times when it comes to managing your money – this could lead to your business loan defaulting. When you default on a loan, you cannot make the payments agreed upon with your lender. When this happens, information will be sent to a debt collection agency, which will continue to contact you until you have made the payments expected of you.
What happens next?
As a result of your defaulting on your loan, your business credit score and report will take a hit. These are two things that will follow you around for years to come, so it is imperative that you do your best to make sure that you keep them healthy. When you default, your credit score will deplete, and it will be shown to lenders on your report. If you need help with your finances in the future, you are unlikely to be approved as you will be seen as an untrustworthy borrower. You may also face higher interest rates because of the risk.
How can you prevent this?
If you take out a business loan, you need to make sure that you can afford the repayments so that you don’t push yourself into further financial difficulty or impact your credit score. Here are a few ways that you can ensure that you don’t default on your business loan.
Track spending and cut back
If you’ve taken out a loan, you first and foremost need to make sure that you can afford to pay it every month. You can do this by tracking your expenses and having a good idea of how much you have coming in and how much you pay in outgoings. You should treat your debt repayment as one of your outgoings. And if you find that you don’t have enough money coming in to cover the payment, you’re going to need to make cutbacks. Take a look at where you are spending your money and see if there is anything less important that you could get rid of – think overspending, or things you could live without.
You need to prioritise your loan repayments, for the sake of your financial health. Making sure that you treat your loan as a primary expense each month means that you’re less likely to push it aside and forget about it – leading to default. If you have a few loans to repay, choose the smaller ones to pay down first so you can use the extra income once this is paid off to make a start on your larger debts. Doing this means you can pay your debt off regularly and eventually; you will be debt free.
Choose a loan that is right for you
As much as ensuring that your loan doesn’t default depends on consistent repayments, it also depends on you making the best decision for you in the first place. Of course, unprecedented events can happen with could lead us to not be able to afford repayments that we didn’t see coming. But choosing a loan that meets your needs, and a lender that offers you a suitable repayment period and amount means that you are more likely to be able to manage your debt more easily. Make sure you do your research and compare lenders before making your mistake – too big a loan over too short a period could mean defaulting. Be sensible when taking out additional finance.