Small and medium-sized enterprises (SMEs) are the backbone of many economies. They not only provide employment opportunities but also contribute to economic growth and serve as a key source of innovation. However, SMEs are often vulnerable to fluctuations in micro and macroeconomic conditions. When the industry they operate in experiences growth, SMEs tend to thrive, but if it shrinks, they may struggle to survive, facing financial challenges like cash flow issues and difficulty securing financing. To help SMEs overcome these obstacles, one effective solution is to extend the repayment period of their loans. In this blog post, we will explore why extending debt repayments can benefit both lenders and SMEs.
The main goal of lending is to provide financial resources to companies for a specified period and receive repayment of those funds, along with interest. However, SMEs sometimes encounter obstacles, such as cash flow constraints and unforeseen expenses, that make repaying loans difficult. In these difficult situations, extending the repayment period can be the best approach for both the lender and the SME by enabling the SME to keep up with loan payments while investors continue to receive some payments on the debt.
Extending the repayment period can help SMEs better manage their cash flow and reduce the risk of defaulting on loans, which can have serious consequences for both parties involved. Although there are drawbacks for investors to extending repayment periods, this option can provide a practical solution for SMEs facing financial challenges, allowing them to fulfill obligations while lenders continue to receive interest on the loan.
Furthermore, taking a hard-line approach with SMEs who are struggling to repay their loans can result in a lengthy and costly legal process, which is not desirable for either party. By extending debt repayments, lenders can help prevent this outcome and instead foster a positive working relationship with SMEs, promoting mutual trust and cooperation.
It's important to highlight that on all friendly remodulations interest continues being paid on all outstanding capital and also in many cases interest rates are increased to compensate investors for the extension.
In summary, extending debt repayments for loans to SMEs, although not the originally expected scenario for investors, can be the best approach under a difficult situation. It provides a debt repayment plan, while investors continue receiving interests and also supporting the SME in keeping with their business. By taking a flexible and supportive approach to lending, both parties can benefit from a positive working relationship.