How does business loan repayment work?

Repaying a business loan in India usually involves making regular payments, most commonly through equated monthly instalments (EMIs). Each EMI consists of 2 parts: the principal amount and the interest that is charged by the lender. The EMI amount is determined by the loan amount, the interest rate, and the tenure you select at the outset. Businesses usually choose a repayment schedule which can be monthly, quarterly or even seasonally. It is based on their cash flow and the lender’s terms.

Below is how the process unfolds:

• EMI Structure: Payments are made at fixed intervals, with each instalment reducing the outstanding principal and covering accrued interest.
• Flexible Options: Some lenders allow flexible repayment options, such as paying only interest regularly and clearing the principal in a lump sum at the end, or adjusting EMI amounts to match seasonal fluctuations in business income.
• Automated Payments: Arranging automatic payments through services like auto-debit or ECS makes it easier to pay on schedule and lowers the chance of missing an instalment or incurring extra charges.
• Prepayment: If your business has surplus funds, you may have the option to prepay the loan before the tenure ends, though some lenders may charge a fee for early repayment.
• Contingency Planning: Maintaining a reserve fund can help cover EMIs during periods of low revenue, protecting your credit profile.

If you anticipate difficulty in making repayments, it’s wise to communicate with your lender early. Some may offer restructuring or revised terms to help you manage your obligations. Careful planning and regular monitoring of your finances are essential for smooth loan repayment and long-term business health.