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How Do I Avoid Business Loan Default?

By Spodek Law Group | February 20, 2024

How to Avoid Defaulting on Your Business Loan

Taking out a business loan can provide much-needed capital to help your company grow. However, if you default on repayment, it can spell disaster. Defaulting occurs when you fail to make loan payments on time or violate other terms of the loan agreement. The consequences are severe, including damaged credit, legal action, and even losing your business assets. Thankfully, you can take proactive steps to avoid finding yourself in default.

Understand the Default Process

Before making a plan to avoid default, you need to understand the process. There is usually a grace period after missing a payment where no late fees apply yet. After that, the loan becomes delinquent. Delinquency means you failed to pay but the lender has not yet taken serious action.

Typically after 90 days of no payments, the loan goes into default status. However, default timeframes depend on the lender, so check your specific loan terms.

Carefully Review Finances

The first step is reviewing your cash flow, expenses, debts, and financial obligations. This helps you understand why you are struggling to make payments. Common reasons for falling behind include:

  • Declining sales and revenue
  • Taking on too much debt
  • Poor financial management
  • Unexpected expenses
  • Market changes or disruption

Communicate With Your Lender

Contact your lender before you miss payments if possible. Explain that you foresee struggling to make payments and ask about alternative repayment options. Most lenders want to avoid default as much as you do. They may agree to:

  • Lower interest rates
  • Extended payment terms
  • Alternate payment schedules
  • Temporary interest only payments

Seek New Financing

If cash flow is the primary issue, new financing could help avoid default. Be cautious about piling on too much high interest debt though. Some options to explore include:

  • SBA disaster loans
  • Crowdfunding
  • Business cash advances
  • Credit lines

Cut Expenses

Look for any non-essential expenses to trim:

  • Reduce payroll costs with layoffs or cutting hours
  • Renegotiate contracts with vendors and suppliers
  • Delay equipment upgrades and maintenance
  • Cut back on inventory orders
  • Decrease marketing and advertising spend

Increase Sales and Revenue

The other side of the equation is increasing sales to grow your revenue. Some ideas include:

  • Offer limited time sales, promotions, or price discounts
  • Upsell existing customers
  • Launch new products or services
  • Expand marketing efforts on social media
  • Partner with complementary businesses
  • License products or IP to other companies

Consider Debt Consolidation

If you have multiple debts, consolidating could lower monthly payments. This combines multiple debts, including credit cards, vehicle loans, and other business loans, into a single loan.

Reorganize or Restructure Your Business

More drastic business changes could also avoid default. Options like restructuring or reorganization allow you to:

  • Sell underperforming parts of your business
  • Declare bankruptcy to eliminate debt
  • Work with creditors on repayment plans
  • Renegotiate contracts and obligations
  • Lease equipment instead of purchasing

Know What Happens After Default

Even with your best efforts, default may still occur. The consequences make it vital to continue communicating with lenders to resolve the situation. After default lenders can:

  • Report late and missed payments to credit bureaus
  • Refer account to collections agency
  • File a lawsuit against you to recoup losses
  • Liquidate collateral you put up for the loan
  • Seize business assets, equipment, property, and other collateral
  • Place liens on your personal assets and property

Don’t Wait to Take Action

Avoiding small business loan default takes conscious effort and quick action at the first signs of trouble. But it is far less painful than dealing with the fallout after default. Protect your business, assets, and credit by continually monitoring your finances. And keep an open line of communication with lenders. They want you to successfully repay as much as you do. With early intervention, you can work together to find an alternative solution rather than go into default.

Resources

SBA Disaster Loan Program

Business Loan Default: What Happens & What to Do

How to Avoid Default and Collections

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