When your business is strapped for cash, you may consider seeking a loan to make ends meet. At the time, you have every intention of making payments to pay off your loan debt. Sometimes, however, those plans don’t work out. Maybe you’ve missed a payment or two, and now you find yourself delinquent.
Defaulting on a loan is a scary prospect, especially when you’re not sure what the consequences may be. One of the best ways to avoid this issue is pursuing alternative financing options, like a small business line of credit.
There are many factors that impact what happens when your account is delinquent. Some include the length of the loan, the lender, and whether it was secured or unsecured. Here’s what could happen if you default on a business loan.
Lose Your Collateral
A secured loan requires some form of collateral, like your car, property, or other equipment. Small business owners often use personal assets to secure a loan. This is a risky venture, whether you’re a sole proprietor or an incorporated business.
If you default on the loan, the lender can seize your collateral. Your assets will then be sold, with the profits being used to repay the loan.
Negative Impact on Your Credit Score
Lenders can report delinquency to credit bureaus in as little as 30 days after missing a payment. This can have a negative impact on your personal and business credit score.
If your credit score drops, the interest rates for your business and personal accounts could rise. Once you miss a payment, your lender can add fees and increase the interest rate on your loan. If they aren’t successful in securing repayment, they may turn your account over to a collections agency. The longer this continues, the more difficult it becomes to pay off your debts.
A lender can sue your business in the event of a loan in default. In addition to seeking compensation for the loan balance, they can also file against you for fees, penalties, interest, and costs.
Let’s say that the judge files against your business. In this instance, the lender would be able to collect on the judgement in a variety of ways. They can withdrawal funds from your business’s bank accounts, or place a lien on the company’s real estate or vehicles.
If a lender can’t collect directly from the business, they can come after your personal assets. Your wages could be garnished, or they could put a lien on your home or personal vehicles.
Filing for bankruptcy is a serious step, and it won’t solve all the issues surrounding a defaulted business loan. If your business files for bankruptcy, its inventory and assets will be sold at an auction.
If you had a sole proprietorship or partnership, you may be able to file personal bankruptcy, known as Chapter 7. In this instance, your liability for business debts would be erased. However, any personal assets used as collateral could still be seized by the lender.
Rebuilding after filing for bankruptcy takes time, so this step should not be taken lightly. You’ll have to work to rebuild credit. You still may not be able to qualify for a future loan without a co-signer.
Life After Defaulting on a Loan
Once the dust settles, you’ll have problems that linger from a delinquent account. Your credit score will take a hit, making it difficult to secure financing in the future. If you find a lender who will work with you, it’ll likely be at higher interest rates.
Practicing responsible money management is the best way to avoid these scenarios. If you’re not confident in your long-term ability to repay a loan, explore other financing options.
In the event of financial hardships, be proactive and talk to your lender before you miss a payment. This avoids the situation escalating with late fees and collection agencies.
ValueOne works with you to provide a range of financing options, including business loans and lines of credit. What do you need to achieve success? Talk to us about your needs. Contact ValueOne or call 1-855-960-5315 today.