Why You Shouldn’t Default On A Business Loan (& How You Can Avoid It)

Are you worried that you are going to default on a business loan?

Miscalculations, sudden hardship, declining sales, or any number of other things could end up with you struggling to repay your business loan. Don’t panic yet! There are several options for you.

Read on to learn about what happens when you default on a business loan, what you can do to make sure that it doesn’t happen, and how to get back into good standing if it does.

What Happens If You Default On A Small Business Loan

If you miss a payment, your lender will most likely charge a late fee, an insufficient funds fee, or both. Try to avoid missing payments because even one or two missed payments can affect your credit.

If you can’t get back on track, your business loan will enter default status. Most lenders will give you a two-week grace period, but this varies from lender to lender. Default status means the lender is assuming that you’re not intending to make your loan payments, and they’ll move forward with taking the necessary steps to get their money back.

What To Do If You’re In Danger Of Defaulting On Your Loan

If you’re struggling to repay your debts, here are some things you can do.

Contact Your Lender

Chances are your lender doesn’t want you to default. Selling off your collateral is time-consuming. Taking you to court is expensive. Selling your debt to collections means taking a hit to their bottom line.

If you contact your lender 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 payment schedule. After all, your lender 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.

Refinance Your Loan

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 lender reports late payments to the credit agencies.

Prioritize Your Debts

Businesses have a lot of money going in and out. Most of the money going out is necessary to keep 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 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 collateral if you default.

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.

Seek Legal Help

If you can’t find any other way out of defaulting on your loans, you might want to seek legal assistance. A lawyer can help you understand what rights you have in your specific situation.

Defaulting On A Small Business Loan: Final Thoughts

If you’ve done all this work to secure getting one of the best business loans available, defaulting on your business loans is something that should be avoided if at all possible.

If you’re struggling to repay your loans, the worst thing you can do is nothing. Keep in mind that a default is usually a lose-lose situation for both you and your lender, so be sure to communicate with them about your financial condition before the default process begins.