Steps to Take Before Stopping Payments on Business Loans

Steps to Take Before Stopping Payments on Business Loans

If you’re struggling to make payments on a business loan, stopping payments may seem like the only option. But before you do, it’s important to understand the consequences and explore alternatives. Defaulting on a loan can seriously damage your business’s credit and lead to legal action. Here are some steps to take before deciding to stop loan payments.

Talk to Your Lender

The first step is to be upfront with your lender. Let them know you’re having trouble making payments due to financial hardship. Many lenders are willing to work with borrowers, so don’t just assume they’ll demand full immediate repayment. Your lender may be able to:

• Lower your interest rate to reduce monthly payments
• Extend your repayment term so you have more time to pay it off
• Allow interest-only payments for a period of time
• Let you skip a payment without penalty

Communication is key – the earlier you reach out for help, the more options your lender may have. Be prepared with financial statements to give them a clear picture of your situation.

Look Into Loan Modification Programs

There are some government programs that provide relief for struggling business borrowers:

• The SBA offers disaster loan deferment for up to 12 months if your business has been financially impacted by a declared disaster.
• The SBA Debt Relief program provides up to 8 months of loan payments for existing SBA 7(a), 504 and microloans. This temporary relief was part of the CARES Act.
• The SBA offers loan modifications like extending maturity or adjusting payments through its Loan Servicing department.

Check if you may qualify for an SBA loan program – it could provide the relief you need to avoid default. Your lender may also have modification programs, so be sure to ask.

Consider Loan Consolidation

If you have multiple business loans or lines of credit, consolidating them into one loan with a lower monthly payment may help. This combines all your debts into a single new loan with a longer repayment term. While you’ll end up paying more interest over time, it can provide immediate payment relief when you need it.

Banks, credit unions and online lenders offer consolidation loans. Rates vary dramatically, so shop around for the best terms. Be sure to only work with reputable lenders and watch out for predatory offers.

Cut Expenses

Take a close look at your business finances and see where you may be able to reduce spending. Even modest cuts like reducing inventory, renegotiating supplier contracts, or letting go of unused software subscriptions can free up cash flow. You may need to make tough decisions like laying off staff or closing underperforming locations.

Produce a lean operating budget and cash flow projection to get a realistic view of what’s viable for your business going forward. Identify where you can trim costs to direct more money towards loan repayment.

Increase Revenue

Increasing sales and revenue is also key to avoiding default. Brainstorm ways to boost business, like:

• Offering promotions, discounts or limited-time offers
• Launching a new product line or service
• Partnering with other businesses to do cross-promotions
• Starting an email newsletter, social media campaign, or blog to engage customers
• Selling through new channels like online stores or platforms

Even a modest revenue increase alongside cost-cutting could make a big difference in your ability to pay loans. Don’t leave any potential sources of cash untapped.

Sell Assets

Liquidating assets can quickly generate funds to put towards debt. Consider selling:

• Unused equipment, furniture or vehicles
• Real estate, land or buildings if you have more space than your business needs
• Inventory at a discount to quickly turn it into cash
• A subsidiary or underperforming division of your company

This should be a last resort, since selling assets also reduces your long-term business capabilities. But it’s an option if you’ve cut costs and increased revenue and still face default.

Tap Personal Funds

If your business can’t cover the full loan payments, you may need to infuse some of your own money. This could come from:

• Personal savings
• Borrowing against home equity
• Credit cards or personal loans (use caution with high-interest debt)
• Friends and family loans
• Personal investments, retirement funds or insurance cash value (with caution)

This is a short-term emergency option to avoid default until you can get your business back on sound footing. Use personal assets strategically and sparingly if possible.

Explore an SBA Settlement

For existing SBA loans, you may qualify for a settlement offer where the SBA accepts less than the full amount owed. An Offer in Compromise allows you to settle your debt for less if you can prove:

• You don’t have the ability to repay the full debt in a reasonable time
• The business has been liquidated and made payments from the proceeds

Settlements are only approved if the SBA determines you lack reasonable ability to pay. This is a last option but may be possible if your business has failed and you’ve exhausted all others.

Understand the Risks of Default

Before you make the decision to voluntarily default, be sure you know the consequences:

• The lender can sue you to recover what you owe. For SBA loans, they can pursue personal assets.
• Negative information will be reported to business credit bureaus and likely personal credit bureaus.
• It becomes very difficult to get approved for future financing.
• The lender can obtain a court judgment against you and then pursue wage garnishment, put liens on your assets, or force liquidation.
• Interest, fees and penalties will continue growing, increasing the amount owed.

Default should only be a very last resort. Explore every other option first.

Consider Bankruptcy

If your business has failed and you see no way to pay off your loans, bankruptcy may be an option. This can discharge personal liability for the debts. However it comes with its own consequences:

• Your personal credit score will be damaged for years.
• Any business assets may be liquidated to pay creditors.
• Future access to credit will be very limited.
• It can be challenging to start a new business later.

Meet with a bankruptcy attorney to discuss whether it’s the right choice for your situation.

Don’t Wait Until It’s Too Late

If you’re starting to fall behind on payments, take proactive steps immediately. Ignoring the problem won’t make it go away – it will only get worse. The earlier you communicate with your lender and explore options, the more likely you can avoid the damaging consequences of default.

Be honest about your financial situation and demonstrate how much your business means to you. Lenders want to work with responsible borrowers. With open communication, strategic budget cuts and dedication to turning your business around, you can get back on track with your loan payments.