Owners who start missing loan payments usually want a number: how many missed payments before the lender sues? They want the benefit of knowing something in advance, so they can plan their business and financial life accordingly. The answer is a simple one, and it depends on the loan contract you signed with the lender. A borrower can be in default after just one missed payment or six months of missed payments. It really depends on the lender and the contract.
Being in Default
Default means you didn’t pay the debt the way the loan agreement said you would. Whether you have a personal guarantee or not, being in default on an unsecured small business loan or credit card can open up a number of painful financial possibilities. Many of those loans and cards require the owner to sign a personal guarantee to get approved. A personal guarantee is an agreement to repay a small business’s loan with personal assets if the business can’t make the loan payments. If the lender sees that the business is in default on a loan, the lender can contact the borrower and, if the borrower can’t come up with a way to pay off the loan, sue them personally for the balance. The same goes if you run a sole proprietorship: you can be personally responsible for your business’s loan as well.
A secured loan is one that a business owner gets with some form of collateral to secure it. If you used the loan to buy equipment, vehicles, or real estate, that asset is often the collateral, and after a default the lender can seize that asset and sell it in order to pay back the loan balance. On an unsecured loan, the lender may still go after the debt through other means, such as a lien.
A default also leaves a black mark on your business’ credit report that affects its ability to obtain financing in the future. Many lenders report defaults to the consumer credit bureaus too, so it shows up on your personal credit score, putting your personal finances at risk for your failing business.
And if the lender sues, the court may let it take your tax refunds, and your wages or bank account can be garnished. The past due debt also accrues interest and fees. The longer you wait to deal with it, the worse it gets.
How Far Behind Is Too Far
So how far behind is too far? Keep in mind that a default isn’t the same as getting sued. Before a lender sues you, there has to be a default first. That’s why it is so important to understand the terms of your loan agreement. As with all agreements, the fine print is what matters here. Read the repayment terms and what happens if you don’t meet them. Lenders give borrowers time to come up with the payment, but there is no telling how long that “next month” is going to be. If you are behind on your payments, it is better to start addressing the issues as soon as possible.
The best protection starts before you borrow. Write a business plan, forecast revenue and expenses, factor in the interest and fees, and determine what debt it can sustain. Then budget for your work using your projections, not the cash that happens to be in the bank at the time you’re borrowing.
If you haven’t defaulted yet, call your lender. Don’t make the mistake of skipping a payment or two, hoping everything will get back on track. Lenders are used to talking to businesses that are having trouble repaying. And the sooner you discuss the situation with the lender, the more options you’ll have for getting back on track. The call gives you a chance to lay out your options and work with the lender to set up a repayment plan or other accommodation. Many lenders can offer some relief, such as a modified payment plan, forbearance, or a lower interest rate, but they will not do so unless you ask them. As soon as you realize that you can’t make your payments, start talking to your lender about your options. Starting a repayment plan, a lower interest rate, or a forbearance doesn’t change the fact that you owe the money, but it may put you in a better position to deal with the debt. And if the business probably can’t repay the full loan, look at how you could keep up the payments using your personal assets.
If You’ve Already Defaulted
If you’ve already defaulted, the lender may have sold the debt to a collection agency. That means you might be dealing with another company for your debt, one that probably bought it for pennies on the dollar and now wants the full original balance. You may be getting calls every day about the debt. If so, contact the collection agency and verify that the debt is valid. By law, collectors must send a written debt validation letter within five days of first contacting you, and you have 30 days to dispute the debt.
If the debt is legitimate and it’s yours, settlement may be possible, which can save you hundreds or even thousands of dollars. You can negotiate with each creditor to take less than the full amount owed. You can also hire an agency or an attorney to negotiate with creditors on your behalf. Professionals who do this every day know what it takes to make the lenders accept a settlement. They also know the tactics collection agencies use, and they can negotiate with creditors in a way that isn’t always possible if you do it yourself.
If the collection agency has already filed a lawsuit against you, don’t ignore it. Ignoring it could make things worse. If you do not appear to defend yourself, the court may issue a default judgment against you, which gives the collector exactly what it wanted. Talk to a lawyer to understand your options and find out what you can do to protect yourself. Even at that stage, a settlement may still be possible.
So, to come back to the question in the title: how many missed payments is too many? That depends. In some cases, just one. In others, up to six months or more. And the more months you’re behind, the more interest, fees, and penalties are added to the amount you owe. Read the small print and understand your contract. To be sure, financial defaults happen to anyone. Even the most financially responsible person can find themselves in a pinch, temporarily unable to pay back a loan. If you expect to miss a payment, call your lender as soon as possible to see what your options are. If you’re already in default, know your rights with collectors, and if you’ve been sued and are facing garnishment, get an attorney. There is always a course of action. There is no time like the present to take it.
