Those business owners who are considering applying for a loan often don’t take into consideration what happens when you default on your business loan.
Firstly, when you default on a loan, it simply means that you have not met your promised obligations to your respective creditor. Exactly when you are in default will depend on your particular creditor. Some creditors consider debtors to be in default after one missed payment whereas others may take months before taking action.
As such, it is essential to confirm your creditors terms and conditions as your loan agreement should clearly indicate what happens when you default on your business loan.
Although creditors’ terms and conditions may be different, there’s a basic understanding of loan default and guidelines that is the same across all creditors.
What happens when you default on your business loan?
Your credit score drops
If you default on a loan, the credit bureaus will be made aware and your credit score will take a blow. As a result of this, it will become difficult for you to obtain any future loans. However, if a creditor does decide to take on the risk and grants you line of credit, you will have much higher interest rates.
Collateral will be seized, if applicable
If you have secured the loan with collateral, you will lose that collateral in the event of a default. With respect to secured loans, collateral is always required to obtain one. Conversely, if you have obtained an unsecured loan and you default, a number of things may occur. Firstly, creditors will commence adding fees and increasing your interest rates. If they do not receive payment, they may hand your loan over to collection agencies. In the event that the collection agency is unsuccessful, the creditor may take legal action, resulting in garnished wages or placing a lien on your your property.
Defaulting on a merchant cash advance or peer-to peer creditor
- Merchant cash advance: With respect to merchant cash advances, the creditor purchasers a portion of your future funds, thus you may contact the funding company and re-negotiate your payment terms if you the current daily percentage leaves you feeling overwhelmed. If your business shuts down, payments will end.
- Peer to Peer lending: When you default on this type of loan, it usually results in a charge off, or when the creditor declares that they doubt you will ever pay, and thus they remove the delinquent account from their books.
In order to prevent defaulting on your business loan, it is critical that you remain proactive. This means that you should not try to ignore nor hide it. Make your creditors aware that you are in trouble. The majority of the time, the creditor will attempt to assist you to renegotiate your terms or even extend it. Creditors would rather be repaid late than not be paid back at all. Another option available to you may be loan refinancing or consolidation, which is widely used by debtors who need an escape from debt. Other debt relief options include:
Whatever the individual circumstances of your case may be, remaining in control of your business finances is essential to the success of your business. Our experienced debt relief lawyers at ZocLaw.com have helped many businesses navigate through complex debt relief strategies. Schedule your free initial consultation today.