With digitalisation, taking a business loan has become easy and quick. However, before signing the loan application form, we should read the loan terms and conditions, including the loan foreclosure process. Let’s see how Amit smartly did his foreclosing process and saved a decent amount of money.
Amit is a small business owner who financed his business with a small business loan. At some point during the loan tenure, he had surplus cash. In contrast to waiting for the loan to expire, he chose to foreclose with surplus cash. This smart decision helped Amit get out of the debt cycle easily.
Small business loans are available to small and medium enterprises to invest in their businesses. Usually, businesses use these funds for the following purposes:
- To procure raw materials
- Upgrade equipment/machinery
- To meet working capital requirements
- To build inventory
Shriram Finance Business Loans are available with minimal paperwork and flexible repayment tenures. Further, these loans are available at an affordable interest rate starting from 15%* p.a. To figure out the EMI and the total repayment amount, we can take the help of an EMI calculator.
Key Highlights
- A business loan foreclosure is repaying the entire outstanding loan balance before the end of the loan tenure.
- Usually, lenders charge a penalty from the borrower for foreclosure and many lenders allow the borrower to foreclose the loan only after certain EMI payments.
- To get the most out of loan foreclosure, accomplish it during the initial or middle stage of the loan term.
- Loan foreclosure helps borrowers become debt-free and build funds for other goals
What is Small Business Loan Foreclosure?
A business loan foreclosure is repaying the entire outstanding loan balance before the end of the loan tenure. It helps the borrower to get out of debt early. But usually, lenders charge a penalty from the borrower for foreclosure and many lenders allow the borrower to foreclose the loan only after certain EMI payments. Hence, before taking a business loan, read its terms and conditions carefully to understand these factors.
Advantages of Small Business Loan Foreclosure
A few significant advantages of business loan foreclosure are:
Reduces the total interest outgo
EMI has two components. One is the interest part, and the second one is the principal. During the initial years of the loan tenure, the interest component will be higher in the EMI. On the other hand, the principal component will be higher during the last few years of the loan term. If we foreclose the loan during the initial or middle stage of the loan term, we can reduce the interest outgo significantly.
Reduces liabilities
Repaying the entire loan amount before the end of the loan tenure allows borrowers to come out from the debt burden quickly and reduce their liabilities.
Save for other goals
Reducing the debt burden early will allow borrowers to keep aside more for other financial purposes, such as building cash reserves to address emergencies.
Helps to maintain credit score
Repaying the business loan before its tenure will not help borrowers to improve their credit score. But at the same time, it aids in maintaining the score at the same level.
Process of Small Business Loan Foreclosure
The loan foreclosure procedures vary from one lender to another. However, the standard one is as below:
- The borrower can officially inform the lender about the foreclosure decision online by submitting a query, contacting the customer care centre or by an email. This step can be done offline by visiting the nearest branch office of the lender.
- The lender will then provide a foreclosure application form. The borrower needs to fill it up and submit it along with the following documents:
- Loan documents
- Loan account details
- PAN card
- Address proof
- Proof of last EMI payment
- After receiving the application form, the lender will calculate the outstanding loan balance amount and applicable foreclosure charges. This will be communicated to the borrower.
- The borrower can clear all dues through online transfer or demand draft/cheque/cash. Most lenders insist on paying the dues at least 7 days before the next EMI date.
- After receiving all dues, the lender will start the foreclosure by completing formalities, such as stopping EMI instructions, returning all original documents to the borrower, issuing the no-due certificate, etc. It'll take a maximum of 15 working days to complete these formalities.
- The borrower should ensure that they receive the following documents from the lender:
- Receipt of payment of the dues
- Loan closure certificate
- No objection certificate
- All original certificates they have submitted while taking the loan
- In the end, inform the credit bureau about the loan foreclosure so that they will update it in the borrower's credit report.
Factors to Note While Opting for Small Business Loan Foreclosure
There are certain factors that a borrower should take care of before going for a business loan foreclosure and they are:
- Before proceeding with a loan foreclosure, the borrower must calculate how much they can save by repaying the loan amount early. While calculating, consider the foreclosure charges and penalties as well. Opt for the business loan foreclosure only if the impact is significant.
- The borrower should ensure that after the foreclosure, they will not face any cash crunch, as a foreclosure can sweep away a large chunk of their surplus money.
- Avoid going for a loan foreclosure towards the end of the loan tenure. It may not help the borrower to save much as the interest component will be less in the EMI during the later years of the loan term.
- The interest paid towards a business loan is eligible for tax exemption and a loan foreclosure will cease this benefit. Hence, before opting for loan foreclosure, remember to check its impact on the financials of the business.
Summary
Though business loan foreclosure has many advantages, the borrower should check the other side of the coin as well before going ahead with an early repayment decision. A foreclosure decision made in a hurry or without proper planning may force the borrower to take out a new loan due to a cash crunch.
Shriram Finance offers business loans at competitive interest rates. Fast loan approval and quick disbursal are a few striking features of their business loan. Apply now for a business loan to take your business to new heights.
FAQs
1. How do you foreclose a small business loan?
To foreclose a business loan in India, follow these steps: contact your lender, check foreclosure terms, calculate the outstanding amount, arrange payment, submit a foreclosure request and obtain a foreclosure letter.
2. What happens if I foreclose my loan?
When you foreclose your business loan, it is closed, you save on interest, there may be foreclosure charges, and it improves your creditworthiness.
3. Does foreclosing a loan affect credit score?
Foreclosing a loan generally has a positive impact on your credit score, indicating responsible financial behavior.
4. Is it good to foreclose a loan?
Foreclosing a loan can be beneficial as it saves costs, improves credit score, reduces debt, and enhances your financial position. However, consider foreclosure charges and consult with a financial advisor.