How Defaulting on a Small Business Loan Affects Your Credit Rating

Any loan default, whether a small business loan or personal loan default, will significantly drop your credit rating. Defaulting is the result of several other bad debt practices, including missed payments and lack of default prevention. When a future lender sees you have defaulted on a loan, even if your credit score has recovered, you will have a harder time getting a new loan with good terms.

Statute of Limitations on Default

It is important to realize a default will not stay on your record forever. The first thing to understand is the length of the statute of limitations on the debt in your state. Once you know this amount of time, you can begin to understand how significantly the default will affect your score. First, all defaults will drop your score temporarily. It will take three to five years to rebuild your credit depending on how aggressively you pursue credit rehabilitation. Even once you rehabilitate the score, a lender can still see you defaulted when looking at your credit history. There will be a mark of default on your complete report, and this mark will likely stay for much longer than your depressed credit score. In most states, the statute of limitations is between five and seven years. You can contact a credit bureau in order to learn of the statute of limitations in your state. Once the default is past this limit, you will no longer see penalties associated with your small business loan default.

Business Loan Default vs. Personal Loan Default

Your credit score may not distinguish between defaulting on a small business loan and defaulting on a personal loan. This is particularly true if you used a personal asset, like your home equity or automobile, to secure the loan. When you defaulted, your home may have gone into foreclosure or your car may have been repossessed. In this case, you will have both the default and the repossession on your record. A future lender will be further warned against extending you credit by the presence of a foreclosure or repossession.

Limiting Exposure in a Small Business Loan

The best way to limit the possibility your future lenders will know you defaulted on your small business loan is to keep your personal assets separate. When you first take a loan to start your business, you may need to use your own credit and assets to get start-up funding. As soon as the business turns a profit, though, you should be looking for ways to remove yourself personally from the loan. Use the business's legally incorporated identity and Tax ID number in order to apply for permanent financing solutions under the business name. Use only business assets as collateral in the future, protecting your personal assets from potential repossession. If you do this, you will be entirely protected if a default does occur. The default will be counted against the business itself. This is particularly important in a bankruptcy situation. If the loans are in your name, you may have to pay them even if the business is bankrupt.