What Happens when You Default on a Business Loan?

When you default on a business loan, you will have financial repercussions similar to any loan default. Depending on how you structured the loan, you may also see personal repercussions. Default is a word that means you failed to meet the terms specified in your contract. Some loans go into default after you miss just one or two payments, and others only go into default if you fail to pay off the loan in full on time. Regardless of the exact terms of what a default, you will have significant penalties.

Drop in Credit Score

The first financial consequence of a default on a business or commercial loan is a drop in credit score. The credit score will drop after even one missed payment. As the missed payments pile up, the score will drop even further. If you have set up your business so you are not personally liable for this activity, your personal credit score will not be affected. This means you do not have your name anywhere on the loan contract. If you name does appear, then you will also have a drop in personal credit. 

Increase in Interest Rates

Once your credit score drops, your interest rates will increase on current and future loans. Your current loans can only become more expensive if you have an adjustable rate. Most people forget that credit cards are actually a form of adjustable rate financing. Your business likely uses a credit card for a number of day-to-day purchases. These purchases will become more expensive. Again, if your personal credit is tied to the business credit, any of your personal loans with adjustable rates will also suffer. It is important to remove yourself from your business finances as early as possible to prevent this type of thing from happening.

Bankruptcy

When you default, the lender will start legal proceedings to recover the money lost in the loan. If you secured the loan with collateral, this collateral will be seized. Lenders have to pursue other means to collect on unsecured loans. One common way is to file a lawsuit against your business. A judge will determine how to repay the loan by liquidating assets or placing a lien on your finances. If you do not have enough assets to pay off the loan in this fashion, your business may have to declare bankruptcy. Again, you may have to cover the payments personally if you are not removed from the liability for the loan.

Difficulty Finding New Loans

Your business will need to continually find financing to grow and profit. You will have a hard time locating new loans after a loan default. If you survive the first loan default without declaring bankruptcy, you may have to return to using your personal credit or collateral to secure business loans for awhile until the business can rebuild its own credit. You may also have to use personal funds to move the business forward, further placing yourself at risk to save the business.