22 Jun 6 Points To Know About Defaulting On A Business Loan

Whether the loan comes from a traditional source like a bank or an alternative (non-bank) lender, the results are often the same.

It’s how you communicate and behave that can set the tone of how your default will be handled by lenders. Let’s take a look at six things you should know about defaulting on business loans. 

When are you officially in default?

Lenders have their own guidelines for determining when a loan is in default. Some will take action after one missed payment and some will wait months.

Lenders will contact anyone who has let a loan slip into default, and as time passes the communication will become more intense.

If you are using an invoice factoring facility the default instances can be different than simply missing a payment with traditional type loans. These facilities rely on your invoicing and defaults can occur by raising false (fake) invoices, miss-directing payments or deliberately financing invoices that you know won’t get paid.

Some lenders will automatically place defaults on your credit file, while others will simply move straight to appointing third party collections or receivers to take control of your businesses cash flow and assets to immediately begin realising money to be paid back to the lender.

Can a lender take my possessions as repayment?

If the loan is a secured loan, you had to put up some kind of collateral to qualify for the money. In that case, if you default, you will likely lose the collateral. An example of that is an equipment loan. If you default on the money a lender gave you to purchase the equipment, the lender can repossess it to sell at auction as a way to recover the amount of the loan.

Lenders are in the business of making money by recouping the amount of the loan plus the interest (obviously). Sometimes small business loans require you to provide collateral in order to be approved for the loan. If the only way for the lender to recoup the loan and interest from you is to sell the collateral, they will.

With an invoice factoring facility, the security lies within your invoicing and if the default is heavy enough these lenders will appoint a third party receiver to collect the funds on their behalf. This is a very powerful method of collecting and business owners need to aware of the powers they posses, from freezing bank accounts to changing locks. It pays to communicate with the lender if you think you might slip into default, as lenders prefer not to take this path if it can be avoided.

What is invoice factoring? browse all articles about factoring here.

What about an unsecured business loan?

If you didn’t put up any collateral for the loan, it is usually considered unsecured (no tangible assets like, cash, property or receivables). If you’re behind on payments, the lender may begin adding fees and increasing the interest rate. If the lender considers loans in default, the loan is usually turned over to a third party collections agency. If the collection agency is unsuccessful in securing a loan repayment, the agency can take the matter to court and pursue avenues like garnishing wages or perusing personal guarantees of the Directors. This often leads to your personal assets being at risk of being sold to recover debts that your business took on.

Are there problems after the default?

Your personal credit score could drop significantly after defaulting on a loan if the lender chooses to report it, which will make it more difficult to secure a loan in the future.

If your a Director of a company that has had a receiver or liquidator appointed this will stay on the record when the lender does cross-directorship searches, even once you’ve started a new company.

If a lender is willing to take a risk on someone who has previously defaulted on a loan, the interest rate will probably be higher than it would be for someone with good credit. Once again it pays to communicate with the lender to avoid this.

What if I can’t repay my Direct Debit Loan or Peer to Peer Loan?

If you turned to an unsecured lender that direct debits your account for loan repayment as part of the funding, this lender has purchased a portion of your future revenue. If the repayment is too much of a burden, you can negotiate to change the terms. If you close your business the payments end because there are no future revenues to collect. If you signed a personal guarantee, the lender will immediately pursue you directly and disregard any attempt to recover from the business.

If you were paired with an investor through an online peer-to-peer lending platform and default, the loan will usually be written off and the lender will not pursue you or any of your assets.

How can I avoid defaulting on a loan?

If you know that you are going miss payments on a loan, it’s best to get in touch with the lender ASAP before the situation deteriorates. The lender wants to be repaid even if it takes longer than the original term of the loan and may be willing to set up a payment schedule that works for both of you.

Another option is to refinance your existing debt with another lender to avoid the default until your situation improves.

Don’t wait for a default to occur, get matched to options to refinance most debts. Start here.