What can happen if you default on a business loan?
If you are aware that you won’t be able to meet your monthly loan repayment the best course of action is to call your lender and let them know. Most lenders would prefer to work on a repayment plan that works for you than for you to default on your loan and contact shows commitment and responsibility on your part, big ticks with lenders. Sadly sometimes that isn’t enough and a business will default on its loan. This is what happens when they do.
Unsecured Loans
- The first response from a lender is likely to be written chasers for missed payments. These are likely to include warnings that payment later than a certain date will lead to additional interest charges and most lenders will charge you for a late payment notice. In time the lender will contact credit rating agencies to make them aware that repayments are late. This remains on your credit record for 6 years.
- The next response is likely to be handing the loan to a debt collection agency. They may contact you by letter, phone or in person. If you do not respond they are likely to take out a County Court Judgement (CCJ) against you. If this happens it remains on your credit record for 6 years.
- If this fails to deliver payment then the options available to the lender are to force you into bankruptcy (or sequestration if they are a Scottish loan company). This involves a petition sent to your official business address informing you of their actions. Seven days later they will advertise the petition, letting banks and other businesses know that your company is in the process of being forced into compulsory liquidation. When the Banks see this advertisement they will freeze your company accounts, effectively rendering the business bankrupt.
- If you have made a late payment on a loan don’t worry, lenders tend to accept a certain number of late repayments per annum or term of the loan, so long as they are paid within an acceptable time period. But if the number of late repayments acceptable to the lender is breached then they will send you a default notice setting out the terms of your loan and what you need to do next.
Secured Loans
- The first response from a lender is likely to be written chasers for missed payments. These are likely to include warnings that payment later than a certain date will lead to additional interest charges and most lenders will charge you for a late payment notice. In time the lender will contact credit rating agencies to make them aware that repayments are late. This remains on your credit record for 6 years.
- The next response is likely to be handing the loan to a debt collection agency. They may contact you by letter, phone or in person. If you do not respond they are likely to take out a County Court Judgement (CCJ) against you. If this happens it remains on your credit record for 6 years.
- If every effort so far from the lender has failed to result in the receipt of repayments then they can call upon the security that was used against the loan. The lender can take possession and sell the security, but if the security is your home then they will need a court order to do this.
The best course of action if you believe that you are likely to default on a repayment or are no longer able to meet the terms of your loan is to contact your lender, inform them of the problem and look to renegotiate the terms of your loan. Lenders may take lower repayments over a longer period, or a lower but immediate in-full repayment rather than see the full value of the loan wiped from their books. And as a business it is better to avoid black marks on your credit rating that will impact the businesses’ ability to borrow money or receive other types of finance in the future.
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