So You Defaulted on a Business Loan
We know that you fully intend to pay back your small business loan. Delinquency happens when a borrower makes a late payment or misses an installment altogether. Borrowers default on a business loan if they are delinquent for a certain period of time: the time period depends on the lender. Below you will learn what it means to default on a business loan.
1. Can the creditor collect on an unsecured loan?
Some loans require collateral, while others do not. According to “Financing Your Small Business” by James E. Burk, while a creditor lacks collateral to recover or foreclose upon an unsecured loan in default, that creditor can litigate against your company to collect. If the creditor secures a judgment against your company, they can garnish your bank accounts, or place a lien on any real estate or vehicles owned by your business.
2. What happens to my business if I default?
Defaulting on your loans or even just missing a payment adversely impacts your business credit score. Depending on the nature of your business structure, your personal credit score may be affected. Your business interest rates (and possibly your personal rates as well) may rise if your credit score dips. Creditors may also recover losses from business loans through foreclosure, the most severe consequence of a loan default.
3. What happens if my business is not incorporated?
If you’re a sole proprietor, then you and your business are considered as the same entity. You will be personally responsible for the loan payment if your business doesn’t or can’t make it. Your creditors can also go after your personal assets in order to get repaid. They will most likely write off the loan if after doing an asset search in your name, they conclude that you don’t have the means to pay.
4. What happens if my company declares bankruptcy?
Your inventory and other assets will be sold to the highest bidder if your company declares bankruptcy. Your creditors will be paid from the proceeds of the auction, which may amount to only a few cents on the dollar. The costs of the bankruptcy will also be taken from the proceeds of the auction. In the case of sole proprietors and partnerships, you may be able to file for Chapter 7 personal bankruptcy to erase your liability for business debts.
What Should I Do Next?
When applying for a business loan, consider the creditor’s flexibility when it comes to repayments. You know that in business even the best plans can go amiss because of unexpected developments. It’s essential to have a candid conversation with your financier about what would happen if you happen to default on a business loan.
You Can Avoid This Altogether
Next time you are in need of funding, skip the loan! They are designed to make merchants fail! Instead, look for a merchant cash advance – like the one offered by First American Merchant. No crazy interest rates, no mile-long list of obscure papers to locate – and no chance of missing a payment, but to the payback structure. This is the best choice for every merchant – regardless of their credit score.