You had every intention of paying back that small business Loan you needed when cash was tight, but now you’ve fallen behind by a payment, or maybe two. Or maybe it isn’t likely you’ll be able to get caught up on those loan payments anytime soon. Whether the loan came from a traditional source like a bank or an alternative lender online, here’s what happens when you default on a small business loan.

What Happens When You Default on a Small Business Loan?

Lenders have their own guidelines for considering a loan to be in default. Some will take action after one missed payment and some will wait months. Lenders will contact anyone who has let a loan slip into default, and as time passes the communication will become more aggressive. In as little as 30 days after a missed payment, a lender might contact credit bureaus, which will cause the borrower’s credit score to begin to decline.

Can a Lender Take Your Possessions as Repayment?

If the loan is a secured loan, you had to put up some kind of collateral to qualify for the money. In that case, if you default, you will lose the collateral. An example of that is a car loan. If you default on the money a lender gave you to purchase a vehicle, the lender can repossess that vehicle and turn around and sell it at an auction as a way to recover the amount of the loan.

Lenders are in the business of making money by recouping the amount of the loan and interest. Sometimes small business loans require you to provide collateral in order to be approved for the loan. If the only way for a company to recoup the loan and interest from you is to seize the collateral, they will. Kabbage is one option where you don’t have to provide collateral to get a business loan – so your business, house and personal assets don’t have to be on the line if you find yourself in trouble.

What Happens with Unsecured Loans?

If you didn’t put up any collateral for the loan, it is considered unsecured. If you’re behind on payments, the lender may begin adding fees and increasing the interest rate. If the lender considers a debt in default, the loan may be turned over to a collection agency. If the collection agency is unsuccessful in securing a loan repayment, the agency can take the matter to court and pursue avenues like garnishing wages or putting a lien on a borrower’s home.

Are There Problems that Linger after Defaulting on a Loan?

The borrower’s credit score will drop significantly after defaulting on a loan, which will make it more difficult to secure credit in the future. Even if a lender is willing to take a risk on someone who has previously defaulted on a loan, the interest rate will probably be higher than it would be for someone with good credit.

What Happens if You Default on a Merchant Cash Advance or Peer to Peer Loan?

If you turned to a Merchant Cash Advance for funding, the lender purchased a portion of your future revenue. If the repayment is too much of a burden, you can negotiate to change the terms. If you close your business the payments end because there are no future revenues to collect.

If you were paired with an investor through an online peer-to-peer lending platform and default, the loan will usually be charged off and the lender will not pursue you or any of your assets.

How Can You Avoid Defaulting on a Loan?

If you know that your finances are going to prevent you from making payments on a loan, it’s best to be proactive and get in touch with the lender before the situation deteriorates. The lender wants to be repaid even if it takes longer than the original term of the loan and may be willing to set up a payment schedule that works with your budget. Another option may be to secure a line of credit from an alternative lender like Kabbage to meet current obligations when cash flow is tight.

What About Bankruptcy?

Filing Chapter 7 bankruptcy as a way to satisfy creditors is a very serious step that doesn’t eliminate all problems that come with defaulted loans. In the case of secured loans, the bankruptcy filing may eliminate the amount of the debt, but the lender is still free to seize your home or your car if they were offered up as collateral. Filing bankruptcy doesn’t eliminate liens that have been placed on your property. Post-bankruptcy it takes time to rebuild credit to the point where you’d be considered a candidate for a loan again, and even then, a lender might require a co-signer.

What if You Default on an SBA Loan?

Defaulting on an SBA loan is similar to defaulting on any type of secured loan. The SBA didn’t actually lend you the money, but it did guarantee its repayment. The lender will collect what it can and then file an insurance claim. Most of the time small business owners offer up collateral for their SBA loans, so the lender will want that collateral to make up for the lost payments. Depending on state law, the lender may be able to garnish wages, bank accounts and other personal property.

What Happens if You Default on a Business Loan with Kabbage?

At Kabbage, we have a team of experienced Account Management Professionals who are dedicated to assisting you. Borrowers are responsible for making their monthly payment until the loan is paid in full, but in times of severe financial difficulties, our team is specially trained to help analyze your personal financial situation and determine which solutions you may qualify for and how we may be able to provide financial relief. If you find yourself in trouble with your loan, it’s important to communicate with us quickly and steadily to avoid escalated collections activity.

Defaulting on a loan can cause serious issues with your credit score and your ability to secure financing in the future. The best way to avoid going into default is by practicing sound money management that enables you to meet all your credit obligations in a timely manner. But if you reach a financial hiccup that makes it difficult to pay a loan, be proactive and contact the lender sooner rather than later, before the situation escalates. You may be able to get your head back above water without doing harm to your credit score, and your lender will be happy that the debt is satisfied. Also, when considering different loan options, be sure to evaluate the possibility of default, your options, and how you would handle it before accepting terms and taking money.

The SmallBizRising Blog is designed to be an educational content hub pulling information, best practices and practical advice for the small business owner and features topics including accounting, marketing, technology and more.  Be sure to subscribe to stay up to date with new content as it is posted.  The blog was created by The Neat Company and receives contributed content from a group of contributing companies that provide technology, services and solutions to small businesses.

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