For many entrepreneurs, unexpected situations often lead to missed payments or completely reducing loan defaults. According to the 2024 SME Credit Survey, 35% of SMEs had difficulty paying off their debts. Additionally, 27% of the companies surveyed applied for funds to repay or refinance existing obligations.
If this occurs on a secured loan backed by collateral, the lender can take the collateral as a payment. However, with unsecured loans, there is no collateral to support the loan. So paying off an unsecured loan can be far more damaging to both your business and your personal finances.
Below is what happens when you take steps to take if you are struggling to pay your unsecured business loan and the unsecured loan.
What happens if I missed my business loan payment?
It’s never a good idea to not pay a business loan. The initial outcome is incurring late fees, making your financial situation even more difficult. Furthermore, if you fail to pay the loan due date, the loan will be in arrears.
If you continue to miss payments, expect to hear from your lender’s collection department. Leslie Tayne, Esq, founder of Tayne Law Group, a New York-based debt relief law firm. After a month or two, you will receive phone calls and letters “to restore your account to good condition.”
What happens if I default to an unsecured business loan?
After several months of paying your loan, your loan status will usually transition from delinquency to default.
“This means we were unable to repay the loan depending on the terms of the contract,” Tayne says.
Knowing what happens if you don’t pay a loan back will help you take action before it becomes a bigger problem. Here are some things that can happen:
- Your entire loan balance will expire.
- Your lender can grab your personal assets.
- Your credit score may be down.
Your entire loan is due
If the loan is the default, it may trigger what is called an acceleration clause in the loan agreement.
“If the loan or memo has an acceleration clause, the entire loan balance will be paid out immediately if the borrower is unable to maintain certain requirements, such as timely payments,” Tayne says.
Additionally, if the lender sends the debt to the collection agency, the collection fees can also be hit. Worse, the lender can take legal action against your company at this point and will sue you for unpaid debt. This will also incur court fees and potentially attorneys’ fees.
Your personal assets may be seized
Unsecured loans are not supported by assets or collateral, but that doesn’t mean that the lender is not relying on them. In many cases, when offering this type of funding, the lender will require the borrower to sign a personal guarantee. This type of legal commitment allows lenders to offset their risks and means that they are personally liable if the business is the default on debt.
“In certain circumstances, the employer’s personal assets are protected from financial issues related to the business, but that’s not the case of personal guarantees,” Tayne says. “This guarantee agreement allows lenders to chase the borrower’s personal assets if they are unable to satisfy their obligations, including bank accounts, real estate and vehicles.”
Many traditional lenders and SBA loans require personal guarantees of unsecured loans. These lenders expect you to use your personal funds to maintain your business loans when needed. If not, the lender may begin legal proceedings.
Your credit score and report will be affected
Business loan defaults aren’t bad for the immediate finances alone. Your business credit score, and potentially, your personal score, will hit.
After more than 30 days have passed, the lender can report delinquency to the Credit Bureau. When that happens, Tayne points out that “we missed out on loan payments and defaulted to remain on credit reporting for seven years, making it even more difficult to get a loan and credit line in the future.
What if I can’t pay an unsecured business loan?
If your business is facing financial difficulties and is making it difficult to pay off your loan as agreed upon, it is important to be proactive and find a solution that will help you avoid serious consequences.
Consider getting one or more of the following actions:
- Discuss your options with your lender
- Consider debt consolidation loans
- Change the terms of the loan
Talk to your lender
If you can’t afford to pay for a business loan, it’s important to contact your lender as soon as you think there is a problem. The best unsecured business loans come from lenders who are trying to provide some assistance. This may include restructuring your loan, postponing or providing for tolerance, or refinancing your debt.
But ignoring the problem and sliding loan payments into delinquency will only result in more severe consequences that will make it more difficult to reverse or resolve.
Take out debt settlement loans
Obtaining debt settlement loans is another option that can help you recover. Similar to refinancing a small business loan, you are taking out a new loan, but the consolidation involves replacing an existing loan with a single new loan, which may be a better option if you have multiple business loans. Ideally, debt consolidation can reduce monthly payments, shorten your repayment timeline, or in some cases both.
Typically, good credit is required to get the lowest and most advantageous interest rate on a consolidated loan. You also need to plan to help manage your loans. As Tayne points out, “If you don’t address the underlying issues that will cause you to be late in paying your loan, you’ll end up taking advantage of a new loan you can’t afford to pay back and ultimately won’t help the situation.”
Rebuild your debt
Restructuring your debt will change the terms of your loan. This may allow you to extend your payment period and reduce monthly payments. Or you may be able to negotiate a lower interest rate. This is a good option when you are late in paying. It is not clear that you can follow the balance of past deadlines to repay and continue paying.
Do I need to file for bankruptcy for a small business?
This step will have serious consequences, including time-consuming and impacting credit over the next few years, so bankruptcy filing should be your last resort.
The three most common forms of small business bankruptcy filing are Chapters 7, 11 and 13.
| type | It’s perfect for | detail |
|---|---|---|
| Chapter 7 | A company that is planning to close and will no longer require assets to be sold. | Companies sell assets and generate the money they need to pay their creditors. This process is usually quick and often takes less than six months. |
| Chapter 11 | Companies that want to remain open and retain their assets. | Businesses restructure and restructure their debts and plan to pay off their debts. This option is a more complicated type of bankruptcy filing and can be more expensive. |
| Chapter 13 | A company that intends to remain open and hold assets. | The business reorganizes and restructures the debt, pays all back to some creditors, while the other creditors receive a percentage of the debt. You need normal income to pay off your debt. |
There are advantages and disadvantages to bankruptcy filings. Take this step to provide you with the new start you need to handle your debt and recover financially. However, the downsides include liquidation of liquidation assets, depending on the type of bankruptcy you pursue, affecting your credit. There are also debt restrictions based on Chapters 11 and 13 bankruptcy, limiting those eligible to pursue them.
Conclusion
Understanding what happens if you can’t pay back your business loan is important to protecting your financial future. If you encounter unexpected challenges and are late for an unsecured loan, ignoring the issue can lead to serious consequences, such as having to pay the full loan amount, damages, and even the asset seized. However, you can avoid these outcomes by contacting your lender to discuss the situation and pursuing several options, such as seeking debt settlement or applying for a debt consolidation loan.
