No business owner wants to default on a loan, but certain circumstances can make it unavoidable.
Sudden economic downturns, natural disasters and many other factors can lead to significant financial difficulties for your business. Despite your best efforts, these problems can ultimately cause you to default on your loan.
Whatever the case may be, preparing for potential outcomes is crucial, even before an official default happens. Here’s what you need to know.
What constitutes a business loan default?
When you miss a payment on your business loan, your account enters a delinquency state. This is the first stage of default and can occur as soon as your payment is late, even if it is only for one day. Delinquency periods can range from 30 to 90 days, depending on your lender’s terms.
If the delinquency continues beyond the specified period, the lender may consider your loan as default.
What can happen to your business if you default on a loan?
There are many possible outcomes to a business loan default, which will mostly depend on the lender’s policies, the loan agreement and your actions moving forward. Here is what a typical default process looks like:
- Initial communications: Once your account enters delinquency, your lender will likely contact you to see what is going on. This presents an opportunity for bargaining.
- Accelerated balance: The lender may accelerate your loan, meaning the entire balance becomes due immediately.
- Lawsuit or collection: If other resolutions fail, the lender may take legal action against you or work with collection agencies to recover your debt.
- Seizure of assets: The lender may seize the assets you used as collateral if the loan is secured. If it is an unsecured loan, the lender may sell the debt to a collection agency that might use more aggressive collection tactics.
This is not an exhaustive list of what can happen after a default. You must also prepare for other outcomes, such as the impact on your credit score and business operations.
Legal guidance can help you weather the storm
A business attorney can provide invaluable guidance during situations like this. They can help you negotiate with your lender, explore debt relief options and decide on the best course of action to protect your business.
Defaulting on a business loan can lead to an incredibly difficult journey ahead, but proper preparation can help save you from the most severe consequences.
