What happens if I can't repay a business loan?

Blogs 7 Mar 2017

This blog explains how failing to pay back a business loan can affect you, your finances, and the future of your company.

Loans are commonplace with many businesses and are used to help companies grow and develop. However, just like any loan, business loans need to be repaid. Missing a payment can have a number of consequences for you, and defaulting on a loan can cause serious problems for your business.

Check the terms of the loan

Before you undertake any business loan, it’s important to check what the terms and conditions are for late or non-payment.

The rates applied, penalties and terms of a loan can differ based on if the loan is secured or unsecured, long term or short term, or if the loan is for something specific, such as equipment.

Understanding the process for what will happen if you run into financial issues can help in selecting the right loan for your business. You should also have a clear understanding of what the repayments are and that you can afford them, before you decide to take out a loan.

Additional costs from missing payments

Missing a loan repayment can incur additional fees and fines, which can vary depending on your loan provider.

Failure to meet a payment date, for instance, could result in a fine for late payment based on a percentage of your monthly instalments. You may also have to pay the administrative costs your provider incurs for having to notify you.

While this might not seem like a large amount at the time, repeated instances can mount up in cost and see a provider take increasing levels of action against you. This can involve your provider deeming your business unable to pay and notifying you that you’ve defaulted on the loan.

Defaulting on a loan

Continually failing to make agreed payments can see you default on a loan. The point where this happens is often set out in the contract for the loan and can be after one or several missed monthly payments.

Defaulting is essentially failing to pay back a loan within an agreed timeframe. This can have a serious impact on your business financing going forward, from the loss of your assets to cover the cost of defaulting to having a negative impact on your credit rating, hampering your future financial options.

Credit Rating

Defaulting or missing loan repayments can have a detrimental effect on your credit score. This can make it increasingly difficult to get access to financial solutions in the future, including other business loans. It can hamper your future business dealings too, as many companies carry out credit checks on companies they consider working with.

It’s also important to be aware that any loan or financial service you do get access to (while you have a poor credit score) may have less favourable terms, due to the increased risk you’re seen posing to the lender. This could include higher interest rates, meaning the amount you pay back on the loan is significantly more.

While there are ways to improve your business’s credit rating, negative information can stay on your company credit file for years. Depending on the severity of the data, this can include seven years for late payments and ten years for some bankruptcies.

Legal action and how FSB can help with loans

In the event that you can’t pay back a business loan, the provider can take legal action in order to reclaim the value of the loan, outstanding interest, fees, and costs.

This lengthy and costly process can be detrimental to a business and, in some cases, can involve having to file for bankruptcy.

Ensuring you meet repayments for any financial obligation is important for your business. Not only does it give you access to funding that can help your business grow and develop, but it also means you can avoid difficult and damaging issues that can hamper the success of your company.

With this in mind, it’s also important for a loan to be manageable and to take into consideration the sometimes unpredictable workings of a business.

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