Defaulting on a business loan can have serious legal and financial consequences. As business lawyers, we often advise clients on the legal risks of falling behind on loan payments. In this article, we’ll provide an overview of common legal implications of business loan defaults from a lawyer’s perspective.
There are a few common reasons why a business may default on a loan payment:
The implications of defaulting on a small business loan can be quite serious:
Like personal credit scores, business credit scores get damaged by missed payments, defaults, and other negative marks. A low credit score makes it much harder to secure financing in the future.
Lenders charge higher interest rates to borrowers with poor credit to account for increased risk. This makes borrowing more expensive.
If a loan is secured by business assets like property or equipment, defaulting could result in the lender seizing collateral. This directly impacts business operations.
For loans secured by real estate, defaulting could lead the lender to foreclose on the property forcing its sale to recover loan amounts.
While a last resort, some businesses file for bankruptcy following severe financial difficulties caused by loan defaults. This leads to liquidation or restructuring under court supervision.
Lenders frequently sue borrowers in default to recover balances owed. Courts can order judgments against the business requiring payment.
If a lender forgives part of a defaulted loan, the canceled debt may count as taxable income to the business. This can result in a hefty tax bill.
Defaulting on a business loan can be extremely concerning, but businesses have options. Here is the typical advice we give clients in this situation:
Defaulting on business loans have major legal, financial and operational consequences. Struggling businesses should proactively communicate with lenders at the first sign of repayment difficulties rather than waiting until after defaulting. Experienced business lawyers can provide counsel on dealing with business debt and help protect your interests when legal disputes arise with creditors. Don’t hesitate to seek legal assistance if your company experiences loan repayment challenges.
For further reading, here are some helpful resources on business loan defaults:
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