Everything You Need To Know About Defaulting On Business Loans
Defaulting on business loans often have the same results including Merchant Cash Advances and Small Business Administration loans. The manner in which you communicate with your creditors determines the action that will be take against you. Below, our experts answer a few common questions that may come to mind when you have defaulted on business loans.
When Have You Officially Defaulted On Business Loans?
Creditors often have their own criteria that indicates when you are in default on a loan. While some take action after one missed payment, others will wait months. Creditors usually contact anyone who has defaulted on a loan, and as the clock ticks, the communication will become more intense.
As opposed to traditional type loans, if you are using an invoice factoring facility the default instances may be different. Invoice factoring facilities depend on your invoicing and defaults may occur by raising fake invoices, miss-directing payments or deliberately financing an invoice that you know won’t get paid.
While some creditors will automatically place defaults on your credit file, others will move straight on to appointing third party collections or receivers to take control of your businesses cash flow and assets in order to immediately start realizing money to be repaid to the creditor.
Can A Creditor Take My Possessions As Repayment?
With respect to secured loans, you have to put up some sort of collateral to qualify for the loan. Thus if you default, you are likely to lose that collateral.
Obviously, creditors are in the business of recovering the loan as well as the interest. Sometimes small loans require collateral in order to qualify for the loan, and if the creditor is unable to recover the loan from you, they may sell the collateral.
In terms of an invoice factoring facility, the security is included in your invoicing, and if the default is serious, these creditors will appoint a third party receiver to collect the funds on their behalf. Business owners need to be aware of this, as this is a very powerful method of collecting. It may be helpful to communicate with the creditor if you believe that you may default on a loan, as creditors often prefer not to take this route if it can be avoided.
What About Unsecured Business Loans?
If you did not have to put up any security for the loan, then it is considered unsecured. In these instances, if you are in default, the creditor may begin adding fees and increasing the interest rate. If you are in default, the creditor usually turns it over to a third party collections agency. In the event that the agency is unsuccessful in recovering the loan repayment, they may take the matter to court and pursue avenues like garnishing wages or perusing personal guarantees of the Directors. This may often lead to your personal assets being at risk.
Are There Problems After Defaulting On Business Loans?
Your personal credit score may drop substantially after defaulting on a loan if a creditor elects to report it, which will make it difficult to secure a loan in the future. Irrespective of whether you have started a new company, if you are a Director of a company that has had a receiver or liquidator appointed this will stay on the record. It is likely, that if a creditor is willing to take the risk on someone who has previously been in default on a loan, the interest rate will be higher than it would be for someone with good credit.
How Can I avoid Defaulting On Business Loans?
If you believe that your business is going to default on a loan, it’s best to immediately get in touch with the creditor before the situation gets worse. The creditor wants to get paid, even if repayment takes longer than the original term of the loan and may be willing to arrange a payment schedule that works for you both.
Another option may to seek the advice of a great business debt lawyer who may be able to assist you. If you have already missed payments, you may file a Chapter 11 bankruptcy. If you prefer to avoid filing bankruptcy, you can enter into debt settlement deals or debt negotiations.