Table of Contents
- What happens if you default on a business loan?
- What happens if your business defaults on a loan?
- What if I had an SBA loan?
- What’s the difference between default and delinquency?
- What you can do before your loan goes into default
- Does defaulting on a business loan affect my personal credit?
- Explore better financing options for your small business
Facing a potential business loan default can feel overwhelming. You need clear answers about your options and next steps. Knowing the difference between key terms like default and delinquency is a significant move you can make to protect your business.
| Credibly believes in your business potential. As our co-founder, Ryan Rosett, often reminds business owners: “Setbacks happen, but understanding your financial position clearly is the key to moving forward with confidence.“ |
In this guide, you’ll learn exactly what a business loan default means, how it differs from delinquency, and the potential consequences for your business operations.
We’ll outline proactive steps you can take before and after a default, and discuss how business financing might impact your personal credit. We’re here to help you regain control.
What happens if you default on a business loan?
Defaulting on a business loan happens when you fail to meet the remittance terms set by your financing provider. This includes missing scheduled payments, not sending the full amount due, or breaking other conditions listed in your agreement. These actions are often called events of default.
Once your financing becomes delinquent, the financing provider may add fees or increase your rates. They can also report the default to credit bureaus. This usually hurts your credit score.
While a default is serious, it does not mean you will never secure business financing again. It means you must be strategic about your next steps to rebuild and find a partner who looks beyond just your credit history.
What happens if you default on an unsecured business loan?
Unsecured loans are not backed by collateral. Instead, they are based on the borrower’s creditworthiness. When your business defaults on an unsecured loan, your lender doesn’t have specific assets to seize immediately.
However, your lender can take legal action. If you’ve provided a personal guarantee on your business loan and you default, the stakes are high. Not only are your personal assets at risk, but your credit rating can also take a significant hit. Lenders often require this guarantee up front for unsecured loans, so it’s crucial to understand the gravity of this commitment.
What happens if you default on a secured business loan?
If you have a secured loan, that means your loan is backed by collateral, which can be assets like machinery or inventory. If your business defaults on this kind of loan, your lender has the right to seize and liquidate the collateral to recover the outstanding amount.
What if I had an SBA loan?
If you default on a Small Business Administration (SBA) loan, you’re still responsible for addressing the lender’s loss. SBA loans often require collateral, so if you default, this collateral can be liquidated.
Remember, the SBA itself is not your lender—the Administration only guarantees up to 85% of the loan for lenders.
If your lender calls on the SBA to guarantee the loan, you’re likely looking at having your wages garnished by the SBA or having your bank account frozen.
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What’s the difference between business loan default and delinquency?
Business loan default and delinquency are terms used to describe different stages of a borrower’s failure to meet the repayment terms of a loan. While they are sometimes used interchangeably, they have distinct meanings in the lending world.
While both terms indicate issues with loan repayment, delinquency is an early-stage warning, whereas default represents a more critical breach of contract.
Delinquency
Delinquency begins the moment a borrower misses a scheduled loan payment. During the delinquency period, which can vary based on the lender’s terms, you still have the opportunity to make up the missed payment, but often with added late fees.
If you miss a loan payment, your lender may offer a short grace period during which you can pay without the account being considered delinquent. If the payment is not made within that grace period, the loan becomes delinquent, which can negatively impact your credit score and make it harder to secure future financing.
This status can negatively impact your credit score and make securing future financing more difficult.
Default
If the delinquency status of your loan continues, this is where you run the risk of going into default. Default signifies a more serious breach of your loan agreement. Let’s say you secured a business loan to acquire specialized equipment for your restaurant.
The loan terms specify that if you default, the lender can seize the equipment. Unfortunately, if you miss multiple payments, you’re in default, and the lender can exercise their right to take the equipment.
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What you can do before you default on a business loan
Before your business loan reaches the default stage, you have a number of options to better manage your debt situation.
Before you default on your loan, it’s essential to take immediate and proactive measures to mitigate the consequences and work towards a resolution.
1. Check your business finances
Keeping tabs on your financial health is crucial to avoid defaulting on your business funding. Start by examining your cash flow statements to gauge if you have enough funds for upcoming remittances. If your cash flow is solid, you’re good to go—keep making those payments as planned.
2. Communicate with your lender
Your first step should always be to contact your lender. Open and honest communication can lead to potential solutions such as renegotiating the terms of the loan or setting up a new payment plan.
3. Take a look at alternative lenders
Start looking at alternative lenders with more flexible financing options—you might be surprised at your options.
4. Rebuild credit
After addressing the immediate concerns, focus on rebuilding the business’s creditworthiness through timely payments on other debts, maintaining low credit balances, and regularly monitoring credit reports.
While being on the edge of defaulting is challenging, with the right approach and resources, business owners can navigate the situation and work towards financial stability.
Tips to avoid business loan default
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Does defaulting on a business loan affect my personal credit?
Unfortunately, in certain circumstances, defaulting on your business loan can impact your personal credit. Here are a few of the factors that you should be aware of:
- Business structure: Sole proprietorship? Your personal credit is going to be affected if you default on your business loan.
- Loan structure: When you get a business loan,your personal assets are often used as collateral to secure the loan. What does this mean for you? If you default on the loan, not only are your assets at risk, but your personal credit score can also take a hit. Understanding the loan structure and its impact on your personal finances is crucial before entering into any loan agreement.
- Resolution of default: If your default leads to business bankruptcy, you might be looking at filing for personal bankruptcy. Doing this has an enormous impact on your credit score.
Disclosures
Credibly merchant cash advances and working capital loans to merchants in California are provided by Retail Capital LLC. All other Credibly products in all other jurisdictions are provided by Credibly or Arizona LLC.
