What happens if you can’t make your business loan payments?

Corporate Finance

With top lenders offering facilities like business loans instant approval, affordable interest rates, and so on, businesses can easily secure funding these days. However, uncertainties are part and parcel of running a business. So, paying loan instalments might not seem so easy when your business hits a low phase. What happens in such a situation? What can you do to recover? Here are the answers to all your questions.

What happens when you’re unable to make business loan payments?

Missing a single payment or being late to pay is called loan delinquency. On the other hand, a loan in default is all about missing a number of payments over the course of time. But whether a loan is in default or delinquent is completely dependent on your lender’s policy.

In any case, you might face the following consequences of not making business loan payments:

Decrease in credit score

When you miss the instalment on business loans, the lender duly reports it to the credit agencies. Thus, your business’ credit score drops, which makes it even more difficult for you to get loans in the future.

Paying the penalty for the loan

As you are unable to make the payments, the lender will charge a hefty penalty fee. In addition to that, they might even increase your rate of interest. This will make it even harder for you to make the payments.

Foreclosure or legal action

The further action taken by the lender depends on whether you have taken a secured or unsecured loan. In the case of a secured loan, such as a business loan against property, the lender has the right to take authority over your asset. If it is an unsecured loan, expect to be charged a late fee. You will find a more detailed description further down below.

Regardless of what the consequences are, there are tough times when you have no way to make the payment right away. So, what to do in such a situation?

What to do if you are about to miss a loan payment?

Rather than surprising the lender with a missed payment, try to get them to help you. If you are sure that you won’t be able to make the next payment, get in touch with your lender and let them know. The lender of an online business loan might offer you a few solutions, such as:

  • allowing you to make a partial payment for now
  • renegotiation of the terms of the loan
  • extending the due date of making payments without any penalty fee
  • temporarily pausing payments to give your business the time to bounce back

There is no reason to think that the lender is out to get you. Instead, be upfront and let them know the reason why you can’t make the payment. Your lender will help you find ways to get the loan payments right back on track as per the schedule.

Not paying a secured loan vs. an unsecured loan: The consequences

A secured business loan is something that you get by pledging a financial or physical asset as collateral like a savings account, your house, jewelry, and so on. But an unsecured loan does not have any collateral backing it up.

So, if you default on a secured loan, the lender will seize the assets that you put up as collateral for that loan. If you had put up your house, the lender will take possession of that. In case you have pledged your business equipment, they will seize your equipment to recover their losses.

For unsecured loans, lenders usually start by charging hefty penalty fees. When you do not pay that as well, they might decide to sue the business and collect the money. If they sue your business, they can seek compensation for a host of things, right from that outstanding balance to the penalty fee, interest, and so on.

Is it possible to recover from the business loan defaults?

As more loan payments are missed, the lender naturally becomes increasingly aggressive in their collection effort. As mentioned before, they might be ready to negotiate a settlement to get their money back. But this should only be considered as a last resort. After all, the process of settlement means keeping you in financial distress for a longer duration. Of course, the credit score for the business has already taken a hit.

The best thing you can do is to have a repayment plan in mind when you apply for a loan. In this plan, make room for emergencies and financial distress. What do you plan to do in case your business registers low revenue for some time and you still need to make loan payments? If you still face a time when you can’t make a payment, talk to the lender directly about it.