Loan Defaults on Commercial Loans

The biggest risk of taking any commercial loan for business financing is loan default. The exact factors that constitute default are set in the loan contract. At times, it requires a notice of default from the lender to the borrower after many attempts to collect payment. In other cases, a borrower may be in default simply by having a payment over thirty days past due. Knowing the terms of your loan can help protect against default and save your business from many potential negative consequences.

Drop in Company Credit

A company builds a credit score just like an individual. When a legal entity is formed, that entity starts a record of balance sheets and finances that will be used by lenders and investors to determine the company's stability. A new company must borrow the credit of the founders or investors. After a while, though, the business will stand on its own legs and start building individual credit. When commercial loans are taken out in the name of the business, any negative activity will appear on the company's credit score. It is important to have a book keeper or controller who is aware of the affect of late payments on this score. 

Loss of Collateral

If you placed a collateral to secure your commercial loan, you will lose the collateral. In some cases, this may be the business itself. Some new business owners place their own cars or homes on the line to achieve financing. When you are considering placing your collateral for a loan, you should keep this risk in mind. Even if your business has a great chance of success, there are always elements outside of your control. For example, many retail stores must go under in a recession. Understanding that some business cycles are outside of the control of the business itself may encourage a borrower to risk less collateral. 

Business Bankruptcy

Bankruptcy is a worse-case scenario in case of a default. In most cases, you will be forced to come up with the cash to pay off the lender. You may have to sell an asset or lose your collateral. When you cannot come up with the money through these means, you will be faced with the option of business bankruptcy. Many business owners make the mistake of pouring their personal funds into the business to save it from bankruptcy. A business must be able to independently support itself in order to survive in the long run. Infusing it with personal funds will only work for a short period of time.

Personal Bankruptcy

Personal bankruptcy for a business owner only occurs if the business was not structured properly to control against this situation. A business must be a legal entity, removed from the personal property of an owner, in order for the owner to be protected when the business goes under. Working with a lawyer when you start a business will help ensure it is structured appropriately. If not, lenders can try to secure the personal assets of a business owner if the business goes under.