What Happens if You Default on a Business Loan?
Defining Default
You are considered in default on your business loan if you fail to make payments as agreed upon in your loan documents. Typically, you need to be at least 60-90 days late on payments to trigger default. However, different lenders may have different definitions of default in their contracts.
Consequences of Defaulting
Defaulting on a business loan can snowball into significant financial and legal issues:
- Late fees and higher interest rates
- Credit score damage
- Call from collections agency
- Foreclosure on collateral
- Lawsuits and wage garnishment
- Bankruptcy
- Business license issues
- Personal liability
- Tax issues
Options Once You Default
Don’t panic if you default on a business loan. You still have options to resolve the situation. Be proactive about addressing it with your lender before it escalates further:
Loan Modification
Contact your lender as soon as possible to discuss a loan modification, which adjusts your original loan terms to make repayment more affordable. This may involve:
- Lower interest rate
- Extended repayment timeline
- Temporary reduction in monthly payments
- Adding missed payments to the end of your loan term
Refinancing
If loan modification doesn’t help enough, consider refinancing your loan. This involves taking out a new loan to pay off the existing one. You must find a lender willing to take on the risk of your struggling business. Having strong personal credit or collateral makes approval more likely.
Forbearance Period
You may be able to get your lender to allow a forbearance period. This temporarily pauses or reduces your monthly payments for several months, giving your business financial breathing room. You still owe the money, but payments are halted.
Partial Settlement
If your business is failing with no chance of recovering, your lender may accept a partial loan settlement. This involves paying a lump sum that is less than your full loan balance.
Bankruptcy
As a last resort if your business is insolvent, bankruptcy may be an option to eliminate or restructure your business debt, including the loan. This can give you a fresh start but makes getting financing very difficult in the future. Consult an attorney about the pros and cons for your situation.
Avoiding Default
Default severely impacts your business’ future, so do everything possible to avoid it:
- Carefully monitor cash flow and stay on budget each month to ensure you can cover loan payments. Get help from a small business accountant if needed.
- Communicate early with your lender at the first sign of financial struggle – don’t wait until you miss payments.
- Build an emergency savings fund to cover loan payments if you have a slow business cycle.
- Consider business credit cards or lines of credit as a backup financing option if money gets tight temporarily.
- Make loan payments a top priority before other business expenses each month.
- Explore ways to cut costs or boost revenue to free up more capital for loan repayment.
Getting Legal Advice
Navigating default on a business loan is extremely complex. Consult with business attorneys and financial experts for guidance on your options. Resources like r/legaladvice, Avvo, and FindLaw offer some initial legal information. But for personalized advice, meet with a local lawyer to understand the laws in your state and weigh the pros and cons of each approach. Don’t go through this alone.Defaulting on a business loan has huge financial implications and can sink your company if mismanaged. Being proactive, getting professional help, and negotiating with your lender can help you survive the crisis with your business intact. Don’t wait to take action on default.
Resources
What Happens When You Default on a Business Loan?
Can’t Afford My Small Business Loan? 8 Options