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Almost all business loans will require that you pay them back in monthly installments, with interest. A default is what occurs when you fail to make these repayments. All your defaults are listed in your business credit report, meaning they will have long-term negative effects.
When a loan goes into default, the lender may be allowed to reclaim their money in other ways. Their options depend on what kind of loan you took out.
Some lenders will only record a default after months of missed repayments and several warnings, while others will quickly do it following any missed repayment. Familiarise yourself with the default terms and conditions when taking out a loan. If your loan has gone into default your lender will contact you.
This depends on the type of loan you took out. Usually, the lender can only pursue your business assets and not your personal ones. For example, if your business goes bankrupt with outstanding debt, the lender might be able to claim and sell off your office space and office furniture, but not your own house and furniture. However, there are exceptions to this:
There are two things you should know before a default occurs, and ideally before even taking out a loan:
Knowing these allows you to determine how serious your financial situation is and how lenient the lender is likely to be. If you have an unsecured loan without a personal guarantee, and negligible business assets, your lender stands to lose money if your business fails, giving them more incentive to go easy on fees and be more lenient with repayments.
Your lender really doesn't want to see you default any more than you do, no matter what kind of loan you have. Initiating legal proceedings, hiring a third-party debt collector and seizing assets is neither cheap nor easy, so it's usually only done as a last resort. The lender knows that even bumping up your fees or interest rates can make it harder for you to repay the loan. Almost all lenders would prefer to offer you an extension or adjust your repayment schedule than initiate default proceedings.
Other than tightening your belt and cutting costs, there are really only two options for you if you think you are going to default. The first and best is to contact your lender.
They may have already been in touch with you, informing you that you are in default or behind on repayments. This is the time to get in touch, not to avoid them.
You should ideally contact them before you officially enter into default so that the lender can adjust your loan for you to more easily make repayments. This way you don't lose the business loan and the bank doesn't have to initiate cumbersome recovery procedures.
When you contact the lender, it will generally do one or more of the following:
This is not always the right course of action, but can potentially be an excellent option, particularly if your current loan has unfavourable rates.
Refinancing a business loan involves taking out a new loan with a different provider and then using this new loan to completely pay off and close your old one. Here's what you should consider before you refinance your business loan:
If you already have a good loan with good terms, then it's possible that you simply won't be able to find a refinancing option that's a good enough step up. Refinancing is not always available, but it's an option that should be investigated before you go into default.
Compare business loan providers below.
Your credit history is a file that financial service providers look at when deciding how fiscally stable and secure you are, how risky lending you money is and therefore what kind of interest rates and fees you'll get. Riskier borrowers are more likely to have to pay extra costs or be declined outright.
All loans, loan enquiries, credit card debts and other outstanding expenses are included in your credit history. The more of these there are, the riskier you are seen to be. Defaults are also specially listed and will count against you in a major way, marking you as much riskier than someone without any defaults.
Defaulting on a loan, therefore, has significant long-term financial impacts, and can make loans and other financial services more difficult and expensive to get. Your lender has to mark in an official default before this happens, which is why it's so important to get in touch with them before defaulting on a loan.
Your business is its own distinct legal entity, and therefore has its own credit history, separate to your personal one. When you default on a business loan, it will generally not appear on your personal credit history unless the loan was personally guaranteed or your personal finances were otherwise closely involved.
If you're defaulting on your repayments due to outstanding invoices, you may want to consider invoice financing. It's a type of business loan that is secured by the unpaid invoices and comes with reduced risk, no asset requirements or interest payments.
Compare invoice financing products below.
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