Business loans have the potential to sink your company just as much as they have the potential to build your company. If yours has fallen behind, you may be asking whether the lender can come and take your equipment, your vehicles or your building. In many cases it can. Whether it will depends on how the loan was originally structured. A loan agreement can be either secured or unsecured. Understanding how business loans work and what to do if you can’t pay can help you protect your assets.
First, are you actually in default? The loan is not automatically in default just because you paid your obligation late. The point at which missed payments become a default can vary greatly depending upon your lender. Some lenders treat you as in default after a single missed payment, while others may wait six months before changing the loan’s status from delinquent to default. Always check with your loan agreement and clarify any concerns you may have.
The key difference between secured loans and unsecured loans is that a secured loan is tied to something that you own. In a secured loan, there is collateral attached. The lender has a legal right to take specific assets if you fail to pay. These can include the equipment, vehicles or real estate the loan helped you buy. Once you are in default, the lender may enforce its security interest. That means it can seize any assets that are pledged as collateral. As you can see, lenders can take your assets for two reasons. First, you have missed payments. Second, you signed your assets away as collateral in the original loan agreement.
As their name implies, unsecured loans are not tied to anything that you own. An unsecured loan is not a “free pass” for a business, though, and lenders have other ways to get their money back that may seem less painful but are just as damaging. The lender may still pursue the debt through other means, such as a lien. And if you fail to make payments on this kind of loan, you could be sued by the lender.
That is where the personal guarantee matters. Many unsecured business loans and business credit cards require one before they are approved. Signing it simply means that the individual will personally be responsible for paying the debt if the business goes under. Having a guaranty on the debt means the lender can pursue your personal assets if your business doesn’t have the cash to pay. In a sole proprietorship, you are personally liable for your debts and legal obligations.
If you can’t or won’t pay, the lender may sue and ask a court to order repayment. Wage garnishment is a legal process through which a portion of your income is withheld and sent to your creditors to pay off your debts. It can happen after a creditor obtains a court judgment against you. The court may also let the lender garnish your tax refunds, and if you guarantee the loan, the lender may be able to reach into your personal bank account to seize funds.
Your credit takes a hit, too. A default hurts your business credit, and because many lenders also report defaults to the consumer credit bureaus, it can damage your personal credit rating and make it harder to obtain additional business loans or personal loans in the future. Assume that late fees and interest are piling up while you’re waiting.
If you haven’t defaulted yet, you still have room to act. A loan application is only half the battle. The other half is doing your research before you even sign the loan application. That means knowing how much you earn, how much you spend each month, and what you expect your business to do in the next few years. It also means calculating the total cost and making sure you know what you’re signing up for. Remember to look at the total amount that you’ll be paying back, and that includes any interest. It is important to be aware of the risks and to understand the terms of the loan before signing anything.
If you already have a loan and aren’t sure you can make the next payment, contact your lender right away. Discussing with the bank before the letter lands on your doorstep shows that you want to resolve the issue. Remember that they’re not obligated to help you, so if you don’t ask, you won’t get any assistance. Sometimes lenders are sympathetic to your plight and will renegotiate the terms of your loan. Relief might be a modified payment plan, forbearance or a lower interest rate. None of these reduce what you owe, but they can give you breathing room to get back on track.
Collection Agency
If you have already defaulted, your lender may have sold the debt to a collection agency. Third parties frequently purchase defaulted debt portfolios for pennies on the dollar and then try to collect the original balance. If a collector is calling, start by asking it to validate the debt. By law, a collector must send you a written validation letter within five days of first contacting you, and that letter should include your right to dispute the amount within 30 days of receiving the letter.
If the debt is legitimate and yours, you may be able to settle it. Debt settlement is a process in which you and the creditor agree to settle the balance of the debt for less than what is owed. In many cases it can save you hundreds or even thousands of dollars. You can negotiate on your own, but it generally helps to have a debt settlement company or law firm on your side. A professional can act as a third-party intermediary, using its credibility and experience to persuade a collection agency or creditor to compromise with you. They also bring perspective and professionalism to your case.
If you are sued, don’t ignore it. You’ll need to defend against it or you run the risk of a judgment in the lender’s favor. If you do nothing, the plaintiff can obtain what is known as a default judgment. The first thing you should do is consult with an attorney. Even then, it may still be possible to negotiate a settlement.
A business loan default can have serious consequences. However, there are more solutions than you might think. So, can a business lender seize business assets? Well, if you have signed away your assets as collateral, and then you have missed your payments, sure, they can. Even without collateral, a lender can sue, and a personal guarantee puts your own property on the line. That is why it’s critical to do your homework before taking on business debt. Know the difference between secured and unsecured business debt and ask the right questions about your loan agreement. If you already have a loan, don’t just ignore a problem. Talk with the lender and see what is possible. If you’ve already defaulted, know your rights and consider help negotiating a settlement. If you’ve been sued, work with an attorney to protect yourself and your assets.
