What Happens to Your Small Business Loan if the Lending Bank Fails

Your small business loan will be purchased by a new lender if your lending bank fails. Depending on how your loan is distributed, this may have a large affect on you or relatively little at all. Loans that were distributed in one lump sum will not see a large change. If you use a credit card to access your loan amount, then the loan may be temporarily suspended. This is the process:

FDIC Handles Selling of Assets

When a bank fails, the Federal Depository Insurance Company steps in to handle the entire liquidation process. Similar to a personal bankruptcy, when a bank goes bankrupt, assets are sold to help cover outstanding debts. Assets include more than just the bank's property. Your loan is an asset because it promises a future revenue stream. Of course, if your loan is in default, then it has already moved into the negative side of the balance sheet. Loans in good standing, though, are on the asset side. As such, the FDIC will sell your loan to a new lender and use the proceeds to cover the bank's debts. You have no control over who purchases your loan. It may be a large bank or a small lender.

Loans and Payments Suspended in Short-Run

While the FDIC handles the process of bankruptcy, loans are temporarily suspended. For individuals who received a lump sum installment loan, the payments are the only thing suspended. They will still be due at the end of the grace period. Your business will need to set the funds aside so it may make the payments at the end of the grace period.

If your small business loan is attached to a credit card, you may no longer be able to use this card. Unfortunately, this can present a problem if you were counting on using the card for immediately payments. There is nothing you can do during this period to reactivate the card since it is not actually attached to an account at this time.

New Lender Picks Up Where Old Lender Left Off

Once the new lender has fully assumed the loan, which typically happens within 60 days, you will be back to business as usual. The lender will contact you with instructions regarding where to send your payments. You will have a short period of time to make payments that came due during the grace period. Failing to pay attention to this time limit can result in default for a number of unsuspecting borrowers.

Your small business loan credit card will need to be replaced. The new lender will issue you a new card. The terms of your loan should be exactly the same. The lender purchased the loan as is, and it is not possible to change the terms without your approval. Of course, if you have a variable rate loan, the lender may attempt to raise rates. Do not ignore any attempt to raise rates. The borrowers that speak up and fight this issue are the ones who end up avoiding rate increases.