If you run a small business, chances are you would have taken a loan. It is particularly important that when you have loan to service, you do not default on your loan repayments. However, at the outset, one must understand what constitutes a default on a loan.
A loan account qualifies as a Non-Performing Asset (NPA) based on 90 day and 120 day delinquency norms. However, the Reserve Bank of India (RBI) in a recent statement noted that that formalisation of business through registration under GST had adversely impacted the cash flows of the smaller entities during the transition phase with consequent difficulties in meeting their repayment obligations to banks and NBFCs.
Accordingly, banks and NBFCs were allowed to temporarily classify their exposures to the Goods and Services Tax (GST) registered Micro, Small and Medium Enterprises (MSMEs), having aggregate credit facilities from these lenders up to Rs 250 million, as per a 180 day past due criterion, subject to certain condition. Earlier this month, small businesses who are not registered under GST have also been given a breather in loan repayment. These norms will stay till December 31, 2018 for small companies not registered under GST and for registered companies, it will revert to the 90 day period after January 1, 2019 in a phased manner.
To avoid defaulting on your business loan, the following can prove to be helpful.
Know your dates – It is important to know the dates for your EMIs. This is particularly easy where you get notifications on your mobile regarding payment dates and the amount is automatically debited through ECS. However, knowing your dates is important to ensure that your bank account stays sufficiently funded. This is also helpful when you have to stagger your outflow of money when you have more than one loan running. It is important to know the dates when each EMI is due and how much you need in hand. Although missing on an EMI
Keep sufficient balance – Your bank account should have sufficient balance to ensure that you do not run the risk of defaulting on a loan. You run the risk of being termed a defaulter if you do not pay within 90 days of a due date, and I ideally advise businesses to keep three months of EMI as reserves to tackle loan repayments. Businesses can be cyclical or an unforeseen event may cause disruptions. In such cases it is always advisable to have enough headroom to ensure your loan repayments are not missed.
Talk to your lender – If you think you are going to miss repaying an EMI, start a conversation with your banker before that happens. It is not wise to sit around and hoping that you do not default. If the chances are real, even your bank would appreciate you being proactive in managing your debt. As stated above, sometimes external events may cause temporary hardship for your business. In such cases, have an upfront dialogue with your bank to find a way out. With the new Insolvency and Bankruptcy Code (IBC), a lot has changed and banks do not have much space to maneuver. In such a case, it is absolutely essential that you start and maintain a steady channel of communication with your bank or lender.
Rescheduling your debt – If you feel the amount of monthly outgo is the real problem behind your repayment, you can negotiate with your lender to reschedule your loan. In such cases, your interest rates are revised and the loan tenure can be extended. This would mean the amount you pay to your lender every month will come down and things should get more manageable. Debt rescheduling does get reported to credit agencies so this would be a negative on your credit report. However, this is a much better option than being declared a defaulter of a loan.
Refinance – This is a step that should be followed before you have actually missed payments on your loan. If you increasingly start feeling that your debt is becoming difficult to manage and a lower interest rate and a longer tenure will help, you can actually look at refinancing the existing loan from another lender. Also called as a balance transfer, refinancing your existing loan can help you reduce your monthly outgo to a large extent.
Live and borrow within your means – This may seem like an oversimplification, but it is very important to have a tight grip on your costs if you have debt to service. There is no getting away from the monthly payments till the debt is paid in full, so every business needs to be judicious about their expenses. Similarly, it is extremely important to borrow only hat you need. Debt or taking a loan should not be easy money for a business. It comes with interest and a repayment scheduled attached with it.
Source: Economic Times, June 19, 2018