Apr 01, 2016

What Happens if you Default on a Business Loan?

We know that you fully intend to pay back your small business loan. Delinquency happens when a borrower makes a late payment or misses an installment altogether. Borrowers default on a business loan if they are delinquent for a certain period of time: the time period depends on the lender. Take this simple four-question quiz to find out how much you know about the default process.

1. Can the creditor collect on an unsecured loan?

Some loans require collateral, while others do not. According to “Financing Your Small Business” by James E. Burk, while a creditor lacks collateral to recover or foreclose upon an unsecured loan in default, that creditor can litigate against your company to collect. If the creditor secures a judgment against your company, they can garnish your bank accounts, or place a lien on any real estate or vehicles owned by your business.

2. What happens to my business if I default?

Defaulting on your loans or even just missing a payment adversely impacts your business credit score. Depending on the nature of your business structure, your personal credit score may be affected. Your business interest rates (and possibly your personal rates as well) may rise if your credit score dips. Creditors may also recover losses from business loans through foreclosure, the most severe consequence of a loan default.

3. What happens if my business is not incorporated?

If you’re a sole proprietor, then you and your business are considered as the same entity. You will be personally responsible for the loan payment if your business doesn’t or can’t make it. Your creditors can also go after your personal assets in order to get repaid. They will most likely write off the loan if after doing an asset search in your name, they conclude that you don’t have the means to pay.

4. What happens if my company declares bankruptcy?

Your inventory and other assets will be sold to the highest bidder if your company declares bankruptcy. Your creditors will be paid from the proceeds of the auction, which may amount to only a few cents on the dollar. The costs of the bankruptcy will also be taken from the proceeds of the auction. In the case of sole proprietors and partnerships, you may be able to file for Chapter 7 personal bankruptcy to erase your liability for business debts.

What Should I Do Next?

When applying for a business loan, consider the creditor’s flexibility when it comes to repayments. You know that in business even the best plans can go amiss because of unexpected developments. It’s essential to have a candid conversation with your financier about what would happen if you happen to default on a business loan.

A small business loan packet is usually made up of numerous documents, including a promissory note, a loan agreement, and some form of guarantee or surety agreement. Look out for “cure” language in the default section of the promissory note. Cure provisions permit a certain time period – typically ten days – to remedy the default after the bank has alerted you.

Borrowers who begin to experience difficulties should make a financial plan so they won’t have to default on a business loan. This plan should be in place before speaking to your creditors, especially if you’re able to make a lower payment or need some other form of assistance. This will help you plead your case for alternate financing.

You can consider loan settlement if you currently have access to quick cash, but cannot continue making regular payments. You need to pay your creditor a lump sum if you opt for loan settlement. This can be anywhere between 20 – 70 percent less than the actual payable. The creditor will close the account once the loan is settled.

It’s best to contact your creditors as soon as possible if you know you’re going to miss payments on a loan. The creditors want to be paid even if it takes longer than the initial term of the loan and may be prepared to establish a payment plan that works for both of you. Another possibility is to refinance your current balance with another creditor to sidestep the default until your position improves.

Lendio helps companies avoid defaults by matching them up with the best lenders for their business needs. In cases where in spite of this a company does not survive the odds, it’s important that the owners approach the creditor and make up a plan. It’s also imperative that business owners make informed decisions when borrowing money, and that they educate themselves on the options available to them if their companies start floundering.

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So what are you waiting for?

About the author

Tyler Heaps
Tyler is a member of the Lendio marketing team. He is passionate about digital marketing, small business, and helping small business owners succeed. Tyler is an outdoorsman and loves spending time with his family.


  1. Hello Mr Heaps, long story short, over the last year and a half, I have entered into and paid off several loans against my receivables. I have 3 different ones currently, the largest one being 36k of which I have paid 2 months of a 6 month term. In may my company suffered a an expected turn of events and loss our ass. Now this loss of $6,200 was agreed to be paid over an 8 wk period aside from what is being taken out of my bank currently, I am sinking and sinking fast. I will talk to the largest creditor tomorrow Monday but if they cannot offer a reasonable deferment or lowering of payment for at least two months, I will have no other choice then to stop making payments to this and the other two creditors until I can catch up on all other bills I have set to the side while I pay off this an expected debt

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