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  • Writer's pictureDaniel Rodriguez

Consequences of defaulting on a business loan

Business loan default, defined A business loan default happens when you fail to make the loan payments for a certain period, which may vary depending on your lender and the loan terms. Lenders typically try to work with companies to get the loan payments back on track and may offer interim solutions such as restructuring payments or moving a payment to the end of the loan contract to give you a chance to catch up. The lender attempts to minimize their losses by helping you find ways to continue making payments on the loan.

Loan default consequences If you default on a business loan, the impacts vary depending on a variety of factors, such as the loan type and your business structure. The lender may initially remind you to pay by sending letters and phone calls to discuss the loan status. If you do not speak to the lender or work out some resolution with them, they may send your loan to a debt collection firm. At this point, the loan may include additional fees, interest and penalties. Your business credit score will suffer and may also affect your personal credit score. Depending on how the lender reports the loan to credit bureaus, the loan default and a court judgment could appear on your business and personal credit histories. This issue may impact your ability to get future loans or lines of credit from suppliers. You may consider the possibility and consequences of filing Chapter 11 bankruptcy, which will stop the lender from pursuing you and give you the means to restructure the loan and other debts to an amount your business can afford.

Legal action In some cases, if you work as a sole proprietor or if you personally guaranteed your business loan, the lender or a debt collector may decide to sue you for the loan repayment and other costs. If you go to court and lose the case, you may be liable for the loan balance and legal fees for the lender or debt collector. If you are personally guaranteed the loan, you may need to sell your personal assets to repay the business debt.

Bank account and tax refund garnishment Suppose you do not have physical assets that a lender or debt collector can seize for repayment, such as you might have with a personally guaranteed SBA loan. In that case, a lender may attempt to recover their money by garnishing your business or personal bank accounts. If you default on an SBA-backed loan, you may find your tax refund withheld by the federal government to offset the loan amount you must repay. Defaulting on a business loan can have severe financial consequences for your business and personal finances. If you maintain communication with your lender, you can work out a solution or discuss other available options, including business bankruptcy.

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