For many women entrepreneurs in India, accessing credit is already a challenge. And once they secure a loan, managing repayments is important to avoid getting into a debt trap. This blog provides practical tips on how to avoid getting into a debt trap, how to manage debt repayments, and ways to escape debt trap if you’re already stuck in one.
Understanding the Debt Trap
So, what is debt trap? A debt trap happens when you borrow money to repay previous loans or when your repayments become unmanageable. Instead of reducing your financial burden, the debt grows, making it difficult to break free.
How Do Small Business Owners Fall into a Debt Trap?
- Taking multiple loans without a clear repayment plan.
- Opting for high-interest loans due to urgency.
- Poor cash flow management leading to missed EMIs.
- Using personal credit (credit cards, informal loans) to run a business.
Case Study: A Real Story from an Indian Woman Entrepreneur
Pooja, a home-based bakery owner in Pune, took a ₹2 lakh business loan to expand her kitchen. Without a clear business plan, she ended up taking a high-ticket loan and with no clear repayment plan. When profits dipped, she borrowed again to pay EMIs, leading to multiple loan burdens. Eventually, she had to shut operations for sometime. If she had planned repayments better, she could have avoided the struggle.
Debt Trap – How To Avoid It: 5 Smart Tips for Small Business Owners
1. Borrow Wisely
📌 Only take loans when necessary.
A loan can help grow your business, but if not planned may lead to a debt trap. Ask yourself: Do I really need this loan? Also, avoid taking multiple loans or borrowing. Instead, borrow within your repayment capacity to ensure you can pay back within a particular time frame.
💡 Pro Tip: If your monthly business revenue is ₹1,00,000, your total EMIs should not exceed ₹30,000-₹40,000.
2. Compare Loan Options
📌 Not all loans are the same.
Always compare lenders before taking a loan. Look at the interest rate, repayment terms, hidden fees, processing charges and other documantation details.
💡 Pro Tip: Lower interest rates might sound attractive, but watch out for hidden fees and inflexible repayment options that can hurt your cash flow.
3. Have a Repayment Plan
📌 A repayment strategy is key to staying out of a debt trap.
Before applying for a loan, always calculate your expected EMIs and ensure they fit within your monthly budget. A good rule of thumb is to keep EMIs below 30%-40% of your monthly revenue.
🔍 Plan Ahead: Build a loan repayment schedule to track due dates and avoid missing payments. You can also automate payments to stay consistent.
💡 Example: If your EMI is ₹20,000 and your business has a slow month, a well-planned repayment strategy will help you avoid defaults and late fees.
4. Avoid Using One Loan to Pay Another
📌 Taking a new loan to pay off an existing one creates a dangerous debt cycle.
Taking a new loan to settle an existing one frequently results in increased debt because of higher interest rates and extra fees. Rather, prioritise boosting your cash flow and cutting unwanted expenses to handle your repayments.
💡 Pro Tip: If you’re struggling, speak with your lender to restructure the loan or negotiate a lower EMI. Lenders may offer relief options if approached early.
5. Keep a Buffer Fund
📌 An emergency fund is your safety net.
Business revenues can fluctuate. An emergency fund will help you manage EMIs during lean months without taking on more debt. Try to save at least 3-6 months’ worth of business expenses to ensure you can cover payments during unexpected situations.
💡 Pro Tip: If your monthly business expense is ₹50,000, having a reserve of ₹3,00,000 can help you stay afloat during tough times.
🔍 How to Start: Save a small percentage of your profits every month and gradually build your fund.
Signs That Show You Are in a Debt Trap
How Do You Manage Debt Repayments?
1. Prioritize High-Interest Loans
- Pay off high-interest loans first (e.g., credit card debt, informal loans).
- Use the snowball method—clear smaller debts first to reduce the burden.
2. Automate Repayments
- Set auto-pay options to avoid late fees.
- Use UPI apps or net banking for quick EMI payments.
3. Negotiate with Lenders
- If struggling, talk to your lender about lowering EMIs or extending tenure.
- Many banks offer loan restructuring options for small businesses.
4. Boost Business Income
- Increase pricing, offer discounts for advance payments, or expand services.
- Cut unnecessary expenses and reinvest profits smartly.
How Can You Manage Your Money to Avoid Debt?
1. Track Business Expenses
- Use free apps like Khatabook, OkCredit, or QuickBooks to track earnings and spending.
- Maintain a separate bank account for business transactions.
2. Create an Emergency Fund
- Save small amounts monthly to cover unexpected costs.
- Avoid taking short-term loans for minor cash flow issues.
3. Reinvest Profits Wisely
- Instead of taking loans, use a percentage of your profits to grow your business.
- Avoid risky investments that may not guarantee returns.
How to Escape the Debt Trap
If you’re already struggling with multiple loans, here are ways to break free:
1️⃣ Spend on Essentials: Cut back on wants and focus only on necessities until you clear your debts.
2️⃣ Use Credit Cards Wisely: Avoid spending on dining, entertainment, and shopping—stick to essential purchases only.
3️⃣ Say No to Unnecessary Loans: Never take loans for holidays, gambling, or to help others financially.
4️⃣ Borrow for Business Growth Only: Take loans with a clear growth plan and realistic projections.
5️⃣ Build a 6-Month Emergency Fund: Save enough to cover 6 months of expenses to avoid future debt traps.
Conclusion
Loans can fuel business growth, but only if managed wisely. For women entrepreneurs, financial literacy is key to staying debt-free. Smart money management and timely repayments can ensure business stability and long-term success.
Read more:
10 Ways How To Spend A Business Loan Wisely
How to Build a Strong Credit Score Before Applying for a Business Loan
Tips To Apply For A Business Loan
