What Happens if You Can’t Pay Back Your Business Loan?

Business loan

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Actions have consequences. Inaction does, too. Failing to pay back a business loan on time could result in extra interest payments, late fees, and even legal action. There’s really no option for not paying at all. In some way, the lender will always get their money back.

Knowing that, it’s important to take steps to ensure you’re able to make your payments or come to some type of settlement offer with the lender. Begin the process by using a loan payoff calculator to determine how much you owe, then put a plan into action. 

Consequences of not paying back a business loan

Knowing the consequences of not paying should provide motivation to come up with a way to pay off or settle your outstanding business debt. Chronologically, you’ll be hit with late fees first and of course end up paying more overall because interest compounds. 

After a few missed payments, you’ll start getting letters from your lender. Unlike personal loans, there’s no credit score that will take a hit. But your company’s credit rating may be downgraded, which could affect your ability to borrow in the future.  

There may be a penalty-free grace period or the option of deferring a payment to the end of the loan term if your financial problems appear to be short-term. Either way, contacting the lender when you start to fall behind is your best option.

If your business loan is a secured loan, you’re at risk of losing the assets your company put up for collateral. If it’s unsecured, the lender may take you to court and ask for a seizure order of your liquid assets. This happens in extreme cases, when the borrower refuses to pay.

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Asking the lender for a settlement offer

If you’re unable to pay due to economic circumstances or financial distress, you could ask for a settlement offer. This is where you pay a percentage of what’s due rather than the entire amount, and the lender charges off your remaining debt is charged off as uncollectable.

Settlements are a slippery slope you want to avoid if possible, particularly for a business that’s looking to build its credit rating with the banks. Every action you take now will affect future interactions that involve lending or lines of credit.

Before asking for a settlement, see if the loan terms can be modified or “refinanced” to give you a lower monthly payment. This might result in a higher interest rate, but it will give you some runway to get back on your feet financially. Many business owners do this.

Recovering from a business loan default

Sometimes, bad things happen—like global pandemics. Thousands of business owners struggled in 2020 and many of them are facing potential defaults and late payments. Just know that you’re not alone.

If you’ve already defaulted and the account is in collections, try to negotiate. Pay what you can when you can and eventually you’ll get out of debt. Agreeing to a payment plan will also keep you out of court, which is critical if you want to keep your business open during tough times.

By Kevin Flynn

Kevin D. Flynn is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their eight wonderful grandchildren and two cats.

Business loan article and permission to publish here provided by Olivia Alex. Originally written for Supply Chain Game Changer and published June 6, 2021.

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