In short
Example: a shop owner's loan
Example: say Ramesh runs a small clothes shop. (Ramesh is made up. This is an illustration, not a real client.) His sales have dropped. He has ₹6 lakh due on a business loan and has missed two EMIs. What should he do first? He should talk to the lender early, in writing. He can ask about restructuring before settlement. He should also check whether he signed a personal guarantee.
Options to ask your lender about
- Restructuring or rescheduling, if your business is viable but cash flow is tight.
- A short moratorium, if you can show when income will return.
- A compromise settlement, under the lender's board-approved policy, if the business cannot repay in full. RBI's June 2023 framework covers this.
Things to check
- Is there a personal guarantee? A settlement with the company may or may not release the guarantor. Read the offer carefully.
- Is there collateral? Ask what happens to it.
- Are there cheques or ECS mandates? Bounces can lead to notices.
Documents
GST returns, bank statements, profit and loss account, list of receivables, and proof of the business loss.
For legal questions about guarantees or insolvency, see the note below. For tax effects, speak to a chartered accountant.
Quick answer
If your business can't keep up with loan EMIs, talk to the lender early and in writing. Ask about restructuring or rescheduling first if the business is still viable. A compromise settlement under the lender's board-approved policy is possible but is the lender's decision. Check personal guarantees and collateral before agreeing to anything.
Real situations
Example: say a small manufacturer's biggest buyer stopped paying for six months. Showing the lender the unpaid invoices and a realistic cash-flow plan can support a restructuring request.
Example: say a partner left and the firm is closing. If full repayment isn't possible, a compromise settlement may be discussed; the guarantor should ask in writing whether the settlement releases the personal guarantee.
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Sources
Frequently Asked Questions
What can I ask my lender about for a business loan?
Restructuring or rescheduling, a short moratorium, or a compromise settlement under the lender's board-approved policy.
Does a settlement release the personal guarantor?
It may or may not. Read the offer carefully.