What does it mean to default on a business loan?
When you fail to meet the conditions of your business loan without any warning given to your lender, it is considered a default on your loan. There are two types of defaults:
- Wilful – When you are in a strong financial position and can repay the loan, but you chose not to.
- Non-wilful – when you can’t repay the loan due to circumstances outside of your control, for example, loss of employment or a loss in business.
What happens if I default on a business loan?
The size, type, and tenure of your business loan, in addition to your reason for defaulting and your relationship with the lender determine the consequences of loan default and their severity.
For default on a secured business loan, the lender will take possessions of the collateral you put up against the loan and sell it to recover their losses. In case of an unsecured loan, lenders will charge you a late fee, and depending on the loan size and terms, may take legal action against you and recover their losses based on the legal judgement made.
The loan default and any action resulting from it are recorded on your credit report, where it will remain for the next 7 years. This affects your chances of getting a business loan in the future on favourable loan terms, in addition to negatively impacting your credit score.
How do I avoid defaulting on a business loan?
- Maintain a certain minimum bank account balance to be able to pay your EMIs when they are due.
- Prepare a business cash flow forecast to manage your finances and prioritize debt payments
- Set automatic reminders to keep track of your payment schedule. Here are some mobile apps that can help.
- Communicate with your lender.
- Refinance your business loan or reschedule your debt payments.
- In extreme cases, seek legal advice to know your options.