The successful operation of a business is dependent on a wide variety of factors, including but not limited to, the product or service being offered, the competition, the brand image, the market conditions as well as the availability of excess funds. Of these factors, one with the highest capacity to impact the business is money. After all, it is money that helps meet various needs of the enterprise. Some of the common expenses include working capital needs, purchasing new equipment or machinery, upgrading technology, hiring new personnel, recouping with sudden changes in the marketplace, and dealing with emergencies, amongst other things.
In cases when your business is running low on funds, and you wish to accomplish any of the aforementioned objectives, a business loan can come in very handy. You can opt for one of the two types of business loans:
Secured Business Loans
These loans are procured by offering collateral to the lender. Since the risk proposition of the lender is low, the interest rate of the loan is also comparatively lower. This loan type is ideal for new and small businesses that are in need of funds, but may not have a strong financial standing or the requisite level of creditworthiness to enjoy an Unsecured Business Loan.
Unsecured Business loan
These loans are procured without offering collateral, thereby increasing the risk proposition for the lender. Consequently, one may avail this loan at a higher business loan interest rate. Large-scale businesses generally avail this type of loan.
Foreclosure of a Business loan
Regardless of the type of loan a business procures, one thing remains constant – the interest outgo. As a thumb rule, every business tries to keep its expenses to the minimum to ensure greater profits. One way to do so is to save the money going towards the interest component on a Business Loan. This can be easily taken care of by Foreclosure, which essentially means paying off the loan in multiple parts or full, before the end of the stipulated tenure. This is usually done, when the business enjoys a surplus cash flow. In this case, the interest component only needs to be paid until the loan has been paid off in full, thereby helping in saving on the interest outgo.
How to Foreclose a Business Loan?
More often than not, an SBI Business Loan or other Business Loans for that matter cannot be foreclosed online. Hence, you should be prepared to visit your branch to initiate the process of foreclosure, which usually includes the following steps:
On your bank visit, get in touch with a loan executive, and seek assistance for loan foreclosure. At this point, the executive will guide you through the steps, while also handing out a loan foreclosure form.
You will be then required to fill the form with your personal details as well as the information pertaining the loan, and duly sign the same.
Next, you must furnish the following documents to the bank-
After the submission of documents, you can clear the outstanding loan payment via cheque, demand draft, or cash.
Once the payment is made in full, the bank will issue an ‘Acknowledgement Letter’ stating the same. You should preserve this letter carefully. Then, in the next few days, you will receive the loan agreement, thereby indicating the process is complete from both sides.
Things to Know before Business loan Foreclosure
As simple as the process of foreclosure is, as a business owner, you need to take into consideration the following aspects before going forward with the decision.
The Lender will Levy Foreclosure Charges
While foreclosing a loan helps you save money, it proves to be a substantial loss for the lender. In order to discourage you from prepaying the loan, the lender will levy a foreclosure penalty. This penalty may range anywhere between 0.5% and 2.5% of the outstanding loan amount. You should be prepared to shell out this money, before deciding on the foreclosure.
Besides, it is extremely important that you weigh the savings made through foreclosure, against the penalty, and see if it is still beneficial to pay off the loan. If not, it is better to carry on with regular EMI payments.
That being said, if you enjoy a good relationship with the lending institution, you can always try to negotiate the penalty, and even place a request of waiver of the same.
Your Business Might Face a Cash Flow Crunch
Of course, closing a loan comes with its own benefits, but you must only do so, if you have surplus cash. Otherwise this step may lead you towards an uncalled for cash crunch, with little or no cushion for any bad days ahead. Hence, make sure your finances allow you the ‘luxury’ of foreclosing your Business Loan.
Excess Cash Can Be Used Towards Investments
Even when you have surplus cash, wherein you can comfortably pay off your loan you should always analyse if there are any investment opportunities available. In case, there is an investment which can help you earn greater returns than you will save on the interest outgo towards the loan, then go ahead and invest the surplus money. After all, generating revenues/ returns is the primary goal of any business.
You can Claim Tax Benefits on the Loan
When you file your Income Tax Returns, you can claim deduction on the interest paid towards the loan, by indicating the same as a business expense. When you foreclose your loan, you won’t be able to do so anymore. While the deduction may not be substantial, it can surely be of help if you are a relatively new business.
Timely Repayment of Loan Can Boost Your Credit Score
If you are looking forward to building a favourable credit history for your business, you may want to continue repaying the loan in the form of regular EMIs. The timely loan repayment will reflect the financial discipline of your business, therefore increasing your credit score over time. This may not be the case if you foreclose the loan. Considering that as a business you will need more loans in the future, you should aim to boost your credit rating as much as possible; as it will help you procure Low-Interest Business Loans in the future, that too with considerable ease.
We hope that you now know all that there is to about Business Loan foreclosure, and the aspects revolving around this significant financial decision.