How To Avoid Defaulting On A Business Loan
Whether it’s due to a miscalculation, a sudden hardship, declining sales, or a myriad of other things that might happen when you run a business, you might find yourself struggling to repay business debt. The prospect of defaulting on your loans is a daunting one; we’ve all heard about the debt collectors that come knocking on your door, threatening your kneecaps and those of your loved ones.
Fortunately, if you default on a business loan, your kneecaps are probably safe. Unfortunately, your other assets may not be.
But don’t panic yet! If you’re having trouble paying all the bills, you’ve got a few options; after all, the last thing you want to do is leave the fate of your business entirely up to whatever entities have a legal claim to your assets.
So what, exactly, could happen when you default on a business loan? And what can you do to make sure that doesn’t happen? Keep reading to find out!
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Default vs. Delinquency
Loan delinquency is a fancy way of saying that you’re late making a payment. An occasional delinquency isn’t a terribly big deal, though you shouldn’t make a habit of it. Normally, a lender will charge a fee for delinquent payments, such as a late fee, insufficient funds fee, or both. Every lender is a little different.
If you don’t get back on track, your loan will enter default status. It’s common for lenders to give you a two week grace period before putting your loan into default; but again, it really depends on the lender. When your loan goes into default, it means the lender is assuming that you are not intending to continue making payments on your loan and they’ll begin taking the necessary steps to get their money back.
What Happens if I Default on a Loan?
Whether because you can’t pay or you won’t, if your loan goes into default, your lender will want to get their money back. The following are things that might happen if you defaulted on a loan. However, everybody’s experience will be different depending upon the lender and situation.
Report to Credit Agencies
At some point, the lender will report your delinquency to personal and/or business credit agencies. The credit hit will lead to higher interest rates on services that rely on credit scores, like credit cards. You’ll also have more difficulty using services that look at credit reports in the future.
Seizure of Collateral
If you have pledged specific assets, such as equipment or bank accounts, the lender will go ahead and collect what they can.
Small Claims Court, Lawsuit, or Nothing
On the other hand, if you haven’t pledged specific collateral, but you have signed a personal guarantee or non-specific collateral (usually in the form of a UCC-1 blanket lien), it’s a bit more difficult for lenders to get their money back. There are three big options, depending on the size of the remaining debt and your situation:
- If the amount of debt you still owe is relatively minor, the lender might take you to small claims court. Small claims court is used to expedite disputes over a small amount of money, so it’s a fairly easy process. A lender can sue if the amount of outstanding debt is somewhere between $3K and $10K, but the maximum amount varies by state. If you live in Washington, for example, a lender can’t sue you for more than $5K. Here is more information about small claims court, and here is a list of the maximum amount a lender can sue you for by state.
- If the lender suspects that you’ve got enough money, but you don’t want to pay (remember: most lenders have read-only access to your bank account), they might take you to court.
- If the amount is more than the limit on the small claims court and the lender doesn’t think you can pay, they might just let you off the hook.
What Can I Do?
Now that we’ve covered all the depressing details, let’s talk about how you can avoid this situation with your business and assets in tact.
If you’re struggling to repay your debts, here are some things you can do.
Talk to your lender
If you call them up and let them know you’re suffering from a temporary setback but will still be able to repay the loan, your lender might be willing to temporarily reduce payments, or work out a better payments schedule. After all, your lender just wants their money back. This should be done as soon as possible; the lending company can’t help you if you don’t communicate with them.
Drowning in short term debt? You’re not the only one. Short term debt can very easily kill a business’s momentum. Fortunately, this is a common problem, so there are a number of lenders available that specialize in refinancing debt. These companies will normally offer you longer loan terms with smaller bi-weekly or monthly payments, which are much easier for businesses to handle.
This is another step you’ll want to take as soon as possible: most companies require a credit score of at least 600, though some go lower. You’ll want to do this before your debtors report your late payments to the credit agencies.
Check out this article for more information on refinancing.
Prioritize your debts
Businesses have a lot of money going in and out. Most of the money going out is necessary to keeping your business running smoothly, but some debt is more important than others. Take stock of what debt is most likely to impact your business’s ability to run, and take care of that first.
Any debt in which the lender has a UCC-1 blanket lien on your assets is very pertinent. If the company gets the go-ahead to seize your business property, that’s seriously going to screw up your business. If you happen to have multiple liens, the oldest loan is the most important; that lender holds the first position, which means they have first dibs on your stuff if things go south.
Other important debt includes anything you have to pay to keep your business running smoothly. This includes things like rent and utilities. Loans secured by collateral might also go in this category if the collateral is integral to the operations of your business.
On the other hand, unsecured loans (like credit cards) fall on the less important end of the spectrum. While leaving this debt unpaid can, and will, carry consequences, it’s unlikely to interrupt the running of your business.
Perhaps you’ve been trying to expand too fast, or you’ve been loose with spending in the past. Take a good look at where all your money’s going and consider finding some ways to reduce cost.
Seek legal help
If you can’t find any other way out of defaulting on your loans, you might want to seek out legal assistance. A lawyer can help you understand what rights you have in your specific situation.
Loan defaulting is a depressing topic; nonetheless, it’s an important one to talk about.
If you’re struggling to repay your loans, the worst thing you can do is nothing. As much as a lender might genuinely care about your business, ultimately they want their money back. You are responsible for ensuring that they get their money back in a way that keeps your business intact.