Why You Should Never Default on Your Business Loan

Very few small businesses trade fraudulently, meaning that the majority take out loans with every intention of paying them back—on time and in full. However, even the best-run business can hit unexpected cash flow problems or take on a major customer who fails to pay, and then the best of intentions can go out of the window.

So what exactly happens if you find yourself in a position where you’ve missed a payment on your business loan? Now what?

The moment your business loan is considered to be in default, your lender will be in touch. Different lenders have different policies on this issue: Some will reckon you have defaulted if a payment is even a day late, whilst others will give you 30 days’ grace or wait until the next payment fails to materialise.

If you cannot resolve the matter with the lender and make the missing payment, you may find yourself referred to a collections agency. Your lender will also report the late payments to the credit bureaus, damaging your credit score and making it more difficult for you to secure financing in the future. The more you are in arrears, the worse the damage to your reputation.

Here are other loan default scenarios:

Defaulting on a secured business loan.  If the business loan is secured on an asset, your lender will seize the collateral to repay the debt—it’s as simple as that. If the asset in question is your home, your family could be homeless.

Defaulting on an unsecured business loan.  Unsecured business loans are a completely different ballgame. Your lender can’t seize your home or other assets, but they will charge late payment fees and possibly increase the interest rate (if the terms and conditions allow this). If they realize the debt isn’t going to be repaid, they will probably sue your company for the outstanding capital and interest. You may be forced to liquidate assets in order to pay the settlement.

Defaulting on a personal guarantee.  If you can’t repay a business loan backed by a personal guarantee, the lender can pursue you personally, and not just your company for the debt. If a court upholds the claim, they can help themselves to your personal assets to cover the debt and any outstanding interest, as well as late payment penalties and court costs. Once again, you could find yourself homeless.

As can be seen, the consequences of defaulting on a business loan can be extremely severe. Therefore you should be cautious about taking out new loans and avoid taking on too much debt. It also makes good sense to pay close attention to your cash flow, thus ensuring that you will have the money on hand to make your loan payments on time, every time.

Should you find yourself in the unfortunate position of being unable to meet a payment, contact the lender immediately, explain your position, and propose a clear plan of action. If you’re honest about the situation, and if it’s clear that it’s a temporary cash flow blip rather than a terminal decline, most lenders will work with you—it’s in their interests to get repaid rather than have to go through the hassle of court action.

Post by: Carl Faulds

Carl Faulds is a business recovery specialist. He started work in the business recovery profession in 1990 and has continued to pursue an ethos of working with distressed businesses to help them overcome their financial problems. As Managing Director of Cashsolv , he offers advice and support to overcome cash flow problems and identify possible underlying problems that can be addressed to ensure a positive future for your business.

Company: Cashsolv
Website: www.cashsolv.co.uk
Connect with me on Twitter , LinkedIn , and Google+

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