Loan repayments are looming, but your cash flow has been lower than expected, perhaps an unplanned bill needed to be paid, or a customer is late to pay their invoice. There are many reasons you might find yourself in financial hot water. But what actually happens if you default on your loan repayments?
This blog explores what happens when you default, the consequences your business might face, and how you can protect yourself and your business.
What is a business loan default?
You might be happy to hear that just missing one loan repayment doesn’t count as a loan default. Lenders usually classify a default as missing multiple consecutive payments or if you’re consistently missing the payment date, i.e. regular late payments.
Small business loan default rates
Missing loan payments can be a common occurrence for small business owners. That’s because there can be many factors affecting cash flow that are largely out of your control, from late invoice payments to market conditions. And alternative lenders are flexible, which means if you approach them honestly and explain the payment difficulties you’re facing, they’re often willing to work with you.
What happens if you default on a business loan?
The longer your payment problems persist, the more serious the consequences. Every time you miss a payment, you add to your debt problems; interest compounds and before you know it, you owe a lot more than your original loan amount.
The lender will issue you a default notice
If you miss several payments, the lender will issue a formal default notice. This means your loan agreement will terminate. If this happens, time is of the essence. By paying the outstanding amount, you can prevent further action. But if you can’t afford that, quickly speak with your lender about alternative payment arrangements. Whatever you do, don’t ignore the notice.
Your credit score will take a hit
After the lender registers the default on your credit file, it stays there for six years. So every time you apply for finance, this marker is visible to other lenders, which could make them think twice before lending to you.
Your business is now classed as high risk for lenders. So, as a high-risk borrower, lenders will offer you higher interest rates and less favourable terms.
The lender will seize your assets
If you defaulted on a secured business loan agreement, the lender can legally seize the collateral used to secure the loan. This might be commercial property, vehicles, or equipment. Whatever it was, the lender can repossess and sell them to recover their losses. This isn’t a quick process, but an unfortunate consequence of defaulting on the loan payments.
The lender can go after your personal assets
If you signed a personal guarantee when you applied for an unsecured business loan, and the company is unable to pay its debts, the lender will come after your personal assets. If you can’t repay the debt from personal savings, the lender can repossess your house or car, even if your company enters liquidation.
They might pursue a County Court Judgement
Getting a CCJ damages your credit score further and is kept on a public record and will also remain on your credit file for six years (along with the default marker). A CCJ is a court order that acts as a demand for payment. Another cost added to your loan repayment are the court fees.
Your company can be forced into compulsory liquidation
If all other debt recovery methods fail, as a last resort, the lender can petition the court to force you into compulsory liquidation. If you can’t contest the petition successfully, the judge will grant what’s called a winding-up order. Your company is liquidated, assets sold off, and proceeds split between creditors.
The wider impact of loan defaults
It’s not just the financial and legal implications of loan defaults that cause problems; it’s the untold stress of the situation you find yourself in. Debt can quickly spiral out of control, and you might feel you have nowhere left to turn.
The worry of losing your business, and potentially your home and everything you’ve worked for, can be an overwhelming feeling. That’s why it’s important to seek money advice as soon as you notice problems arise.
How to avoid defaulting on your business loan
- Talk to your lender as soon as you spot a problem. Don’t wait until you miss payments. Prevention is key in these scenarios.
- Keep a close eye on your cash flow. Having financial visibility over when cash comes in and out of the business gives you the knowledge to make informed decisions. I.e. actively cutting costs/removing expenses you don’t need to keep cash flow healthy.
- Look for a better finance deal elsewhere. Refinancing might mean you can find lower interest rates or a more favourable repayment schedule.
- Seek professional advice. Usually, accounts and business advisors can give you bespoke advice for your current situation. Take advantage of free services like Business Debtline, which can give you free, impartial debt advice.
What happens if you’ve already defaulted?
- Try not to panic, you still have some options. The first thing you should do is contact your lender. Be honest about your financial situation and see if arrangements can be made. Recovering debt is a drawn-out process that lenders will want to avoid if possible.
- Always seek professional help by talking to your accountant or finding an insolvency practitioner. They can look at your finances and suggest a course of action.
- If you signed a personal guarantee, understand that your personal assets are at risk. And if you secured the loan, find out which assets are put up as collateral.
Defaulting isn’t ideal, but it can be manageable
Defaulting can feel like the worst thing in the world. But, realistically, if you move fast and you’re transparent with your lender, you do have options before assets are seized and your company is liquidated.
Being trapped in a cycle of debt can be a lonely place, but seeking help early can make everything more manageable. And defaulting on your loan doesn’t necessarily mean you can’t access finance again in the future.
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