Small business owners often feel like they have to hit the lottery in order to obtain financing. Between the amounts of paperwork, the restrictions and the inevitable expenses of finding new business loans, securing a small business loan can be intimidating to say the least. Especially for new businesses, it can be difficult to meet the expectations of lenders. And trouble repaying a loan can be stressful.
Defaulting on a loan can have huge consequences for your finances, whether it is personal or business. You may not have realized what happens when you go months without paying back your creditor, but if you miss enough payments you could wind up in default. If you find yourself in default, here is what to know.
You likely have some idea about defaulting on a loan, but you might not know what it actually means. Defaulting means you have gone a certain amount of time without making the monthly payment on your loan. The time you can go varies from lender to lender; however some lenders will be more lenient.
Depending on your lender you may only be in default after one missed payment. Some lenders may not consider your debt in default until you have missed six months of payments.
Either way, a default means you failed to pay the loan as agreed in the loan agreement, and it can damage you and/or your business seriously.
Ways in Which Defaulting on Your Payments Can Hurt You
Unfortunately, there are a lot of ways in which defaulting on your payments can hurt you, both professionally and personally.
With many unsecured business loans and business credit cards, you’re looking at a personal guarantee. If an unsecured small business loan or business credit card is backed by a personal guarantee then if the business fails, the guarantor owes that amount and the lender could sue the guarantor to recover the balance.
If you signed a personal guarantee or operate a sole proprietorship, you will need to pay the balance of the defaulted loan with your personal assets.
Of course, there’s collateral, too. If you had to put up any kind of asset to secure your loan, like equipment, vehicles or real estate you bought with the loan, the lender may be able to seize that asset if you default on the loan. (Unsecured loans have other remedies, like placing liens, too.)
In addition to everything else, a default can often severely damage your business credit score, making it very difficult to get loans in the future. Additionally, many lenders report defaults to consumer credit bureaus. That means a default can not only have an adverse effect on your business credit, but it can also destroy your personal credit as well.
Your lender may sue for a payment if you’re in default on a loan, and after a lawsuit, they may be able to garnish your wages or tax refunds, and even your personal bank account.
Keep in mind that your balance may be accruing interest and late fees every month. The longer you wait, the worse it gets, so it’s always best to act as soon as possible.
Things You Can Do to Avoid It
Default is an awful fate. It’s best to prevent it. If you’re not in default yet, there are certain things you can do to avoid it.
An essential step before taking out any loan is to do your due diligence. Plan out the revenue and expenses of your business with a business plan, and budget and forecast what you can afford. Don’t forget to factor in interest fees that your balance will accumulate, and be sure to figure out what the total cost of repayment will be so you don’t end up paying back more than you can afford.
Make sure you understand the repayment terms on the loan you’re considering taking out, and know what the consequences are for failing to abide by them. Find out exactly what would happen if you were to breach your loan contract so you’re not caught off guard.
If you aren’t sure you’ll be able to make a payment, contact the lender as soon as possible, even if you think it will be months out. Even if the thought makes you nervous, acting early will save both you and the lender a lot of grief in the long run.
Many lenders may agree to give you temporary relief if you are struggling to pay, whether that means renegotiating the terms of your loan to give you more time, putting a temporary pause on your payments altogether or agreeing to reduce the interest rate on your outstanding balance. This doesn’t mean that it lowers the total amount of the balance you owe in any way. It just gives you more time.
If it is only the business that is not generating the revenue you projected, as a last resort it might be worth considering using your personal resources to make your loan payments.
Already in Default
Here’s what could happen if you are already in default: the lender could decide to sell the debt to a collection agency. Collection agencies usually buy debts for a few pennies per dollar, but they try to recover the full balance.
You may be getting calls from a collection agency already. In that case you need to request a validation letter, and by law they are required to send one within five days of first contact.
If you are confused about whether the debt is actually yours, you can dispute it. You have thirty days to dispute the debt, and if it was legitimate you may be able to settle the balance.
Settlement means negotiating the debt and agreeing to pay less than what you owe. Rather than paying the full balance you owe, you may be able to save hundreds or thousands of dollars with a settlement. You can negotiate directly with the company or agency you owe the debt, however it might be best to hire a settlement company or law firm to do it for you.
In addition, professional settlement companies or law firms will know all the steps to settling the debt and know all the tactics collectors can use against you, so they will better be able to work with them on your behalf.
An attorney who has a long track record working with collectors is in the best position to be able to protect your rights and work to negotiate a settlement on your behalf.
Never ignore a collection lawsuit. If you don’t respond to it, the court may enter a default judgment, which means the agency will get what it asks for.
If a lender or agency sues you, hire a lawyer to help you form a response and build a case. A debt settlement is still a possibility even in the middle of a lawsuit.
In a nutshell, the consequences for defaulting on a payment can be severe. It’s best to avoid missing any payments in the first place if you can, though sometimes that’s not realistic.
Contact the lender first if you anticipate paying late, even if it’s months out. Be creative and utilize whatever business or personal funds you can to stay current.
If you’re already in default on your loan, familiarize yourself with your rights when dealing with collectors, and consider a settlement company or law firm - it could save you time and money.
If there’s a lawsuit and garnishment in the mix, it’s probably best to have an attorney advocate on your side and protect you and your assets.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
