What Happens When You Default a Business Loan

Financing is the lifeline of any enterprise. Startup companies look for financing to get their businesses running. Luckily, thousands of lenders in the US including banks are willing to offer the financing. This is encouraging to entrepreneurs. However, not every business needs to meet the lender’s expectation. At one point, the business may stall out or end up being closed and the lenders need security for their money.

Loan default processes vary in different states. If an entrepreneur realizes that he or she will not manage to pay the loan, it is important to inform the lender immediately. The lender might choose to either decrease rates or provide interest-only payment opportunities. On the other hand, a lender may adjust loan terms until the business is stable. However, this is dependent on the type of lender.

Once the entrepreneur understands the default process, it can provide the context of what the lender will require. When a small business owner is looking for a loan, the type of lender they will decide to collaborate. That makes all the difference in the case of default.

Consequences of defaulting

The consequences of defaulting loan repayment vary according to the type of lender. Large banks normally take several months or even a few years for the default process to be through.  Small lending shops and alternative lenders could freeze the assets. According to experts, a period of six months without making payment could trigger the default process.

The Dire Consequences

Once the lender starts noticing missed payments, they are likely to reach out to know what is going on with the business. This period is important in making a bargain, which may mitigate the harsh consequences. At that time of default, the full balance will have become accelerated. That implies that one has to pay the full loan amount. The lender, at this point, will include fees outlined in your agreement, such as attorneys’ fees among others.

The next step that the lender is likely to take varies widely. There are three common routes in default situations. The lender might set up a reasonable plan for you to pay back the loan. On the other hand, the lender might seize and liquidate your business or personal assets to cover for the loss. Lastly, the lender might cut the losses of the business and settle with the borrower for a defined amount.

The borrower has to keep in mind that the lender’s interest for you to make payments. This is mainly because they are a company and need to make payments and will be willing to acquire it in the best way possible. Generally what this means is that the lender might be more than willing to work with you.

Once an account is in default, the debtor may have more ways to resolve the debt. This is because the creditor is willing to work with them towards a settlement or even an interest-free payment over duration of time.

If the debtor decides to give collateral to cover the loan, the lender may liquidate that and other assets in order to cover the loan. The decision of the lender to press charges, seize, and liquidate assets largely depends on the relationship and the terms made with the borrower.

Defaulting on unsecured loans

Unsecured loans are loans that are approved without any defined collateral from the borrower. They are more common with small lenders as compared to standard banks.

For an unsecured loan, the entrepreneur will be required to sign a personal guarantee. This is a legal binding statement gives the lender permission to proceed to file with a court to seize and liquidate personal assets to cover the loss.

The assets of the personal guarantor are at risk of being seized once the creditor obtains a judgment against them. If the entrepreneur defaults having signed a personal guarantee, this means your credit score will be affected for 10 years. If an entrepreneur default and have not signed a personal guarantee, the credit score of the business will be affected.

Personal guarantees are important for some loan institutions. That is because it is an easier way to get funding when a business may not qualify for a loan from a standard bank. It is necessary for one to understand the consequences and the agreement structure before signing anything with a lender.

Defaulting on an SBA loan

SBA loans are loans from banks that have backing from the government. It is a program set aside for businesses not qualified for loans with banks or alternative lender due to financial hardship. Defaulting on an SBA loan still means that you have to pay up for the lender’s loss. These loans mostly require collateral that can be liquidated in case of default.

Despite the favorable terms, the SBA requires that the entrepreneur pledge all the available collateral including a person’s residence. In the event of default, the government organization might force a liquidation of collateral to repay the debt.

Get in touch with us if you want to get more information about the possible outcomes after you default a business loan.