What happens to my business if I stop paying - and how do I avoid that?

Walking into a bank for business financing is always intimidating. It can be hard to get, especially for a new or young business, and the anxiety of what happens if everything goes wrong is constant once you sign the papers and money comes into play.

With business loans, default can result after a long period of missed payments. But it hurts more than a late or overdue payment and can tank not just your business’s finances, but your personal ones. What happens, and how you can avoid it, is covered in this guide.

So what’s “default”, anyway? Technically, it means you fall behind or miss monthly payments for a span of time the lender decides. And yes, some lenders are much harsher than others.

Some will count a loan as in default after only a single missed payment. Others may wait six months until your delinquent status switches to default.

Either way, it comes down to not making payments according to the terms and conditions in your loan agreement.

Consequences of Default

So what are the consequences of default? To put it plainly, it can muck up both your professional life, and your personal life.

If you have an unsecured business loan or business credit card, it’s likely you gave a personal guarantee. That means you are on the hook for payments if the business cannot make them. If you cannot, the lender could file a lawsuit to obtain a court order for you to pay.

And if you signed one, or are running a sole proprietorship, the lender may go after your personal assets to pay the defaulted loan.

Borrow money to buy things like equipment, vehicles or real estate and the collateral for the loan can be the thing you bought. Miss enough payments and the lender can take it back. With an unsecured loan the lender may use a lien instead. No collateral does not mean the lender will not come after you.

With a business loan, default can dramatically affect business credit and make it hard to get a future loan. Many lenders also report defaults to consumer credit bureaus, which could seriously damage your personal credit.

If the lender goes to court and gets a judgment it may be able to garnish your wages or tax refunds, and even your personal bank accounts.

You may keep racking up late fees and interest the entire time. Waiting to make up missed payments can quickly become very expensive.

If You Haven’t Defaulted Yet

Does that seem grim? Default can certainly have dramatic consequences for business. But, if you haven’t defaulted yet, you can make a move to make sure you never do.

Before you take out a business loan you should go through the exercise of making sure you will be able to repay it. This means crafting a business plan, forecasting revenue, expenses, cash flow, and factoring in interest, and possibly fees. Due diligence!

Also consider all of your repayment terms, including what happens if you are unable to make one or more payments on time.

If you are not sure you will be able to make a payment, call the lender as soon as you can. It might feel nerve-racking to admit you will not be able to make a payment, but the sooner you do the better off both of you will be.

If you are struggling to make payments on a loan, some lenders might be willing to help you by changing your payment schedule, offering you forbearance, or possibly lowering the interest rate on your loan. Although none of these options will reduce the amount you owe on the loan, they will give you some more time.

If the business will probably be unable to repay, you need to work out a plan how your personal cash or assets can sustain payments over the rest of the life of the loan.

Know Your Rights When It Comes to Debt Collections

Are you currently in default with your business loan? It’s possible the lender already sold the debt to a collection agency. The collection agency usually buys the debt for pennies on the dollar and can then chase down the total debt.

Are you getting calls from a debt collector? Just be sure to get them to validate the debt before you start paying them. They’re required to provide a debt validation letter within five days of first contact.

You have 30 days to dispute the debt. If the debt is valid, you can still negotiate a settlement.

The settlement process means you negotiate with the lender to pay less than what you owe. You can save hundreds or even thousands. It may be possible to do this on your own, but it’s a pretty good idea to get a settlement company or law firm to help you.

People who work at these companies know the process inside and out, and the tricks the debt collectors use to take advantage of consumers.

You should seek your own attorney to better understand and protect your rights after a default. You want an attorney that knows the ins and outs of collections.

If the collection agency does end up suing you over the debt, don’t ignore the lawsuit. The court may enter a default judgment and give the collection agency what it wants.

It’s crucial to call an attorney to help you respond to the lawsuit and build a defense. Settling may still be an option even in court.

If you cannot prevent the judgment from being entered against you, your assets may be put at risk. If you get sued and then garnished, your first step is to hire an attorney to protect your assets.