What Happens When You Default on a Loan?

Having financing is key to running any business whether you are brand new or hoping to grow. Cash flow is unpredictable when you are in the early stages of your business and funding can help cover those expenses to cover operating expenses. It can also supply the working capital you need to take advantage of new investment opportunities or expand your business.

Many business owners are seeking additional financing due to the pandemic since many faced many struggles financially. During this time, they’re searching for business loans that will enable to keep their operations afloat.

Small business owners don’t take on loans with the intention of now paying them back. When they sign their contracts, they’re likely able to repay their loan while meeting other financial obligations. However, there are still situations in which repaying can be hard which leaves many to default.

Many business owners have defaulted in the past and is a common issue that they face, which is why it is important to make sure to avoid it all costs. If you’re considering a business loan to support or expand your operations, it’s important to know what default means and how it can impact you and your company.

What Is a Business Loan Default?

Lenders have their own standards of what is considered late versus a default. Generally, a late payment is considered late if it’s made between 14 and 60 days after the due date. A loan is considered a default when a payment is more than 60 days late.

Before you take out any loan, be sure to ask what the late payment policies are. If you have a month in which you are short on cash, you will know how long you have until you are at a default status. This should always be the last resort and you should always avoid being late.

What Happens When You Default?

If you fail to make a payment, the lender may engage a collections agency to get you to pay. They’ll also report the missed payment to the major credit bureaus.

Making late payments are damaging to your credit score and can remain on your credit report for up to seven years even if you pay it back. It also depends on whether you have a business loan that is secured or unsecured.

With a secured loan, the lender can seize your collateral to repay the debt. Defaulting can impact your personal life and your business, depending on the asset you used to secure your loan. An unsecured loan is different in that the lender can’t seize your personal or business assets to satisfy the debt. However, they’ll likely charge you late fees and may increase your interest rate, depending on the terms of the loan.

Regardless of which type of loan you have; defaulting can cause major financial strain.

How to Avoid Business Loan Default

The best way to avoid business loan default is to not bite off more than you can chew. Make sure you understand the financial situation of your business so that you can make the payments you need to make on time. If you see that it is too much, see if you can borrow a smaller amount until your cash flow becomes more predictable.

A business loan can be a great way to get your business of the ground or support its growth. Missing payments can affect your business and personal life. To avoid long term damage to your credit, make sure you do your homework before you decide which financial solution is the best for you.