If you don’t pay an unsecured business loan, you risk damaging your credit score and reputation among lenders. Lenders can also impose late fees and penalties, adding to the amount owed. Ultimately, failing to pay the debt can lead to creditors taking legal action against you or your business.
Not repaying a loan can lead to a multitude of consequences, but there are options if you can’t afford to pay your loan.
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What Does It Mean To Default On a Business Loan?
Defaulting on a business loan means a borrower failed to repay a loan within the specified timeframe. Typically, you default after missing multiple payments, and once your loan enters default, it triggers a series of consequences that are spelled out in your loan agreement.
With an unsecured business loan, there is no collateral for a lender to take possession of, unlike a secured business loan. Yet, that doesn’t mean there aren’t repercussions.
Depending on your loan, lenders may demand immediate repayment of the full loan amount, impose additional fees or take legal action. A loan default may also be reported to business or personal credit bureaus, which can make it more difficult to secure financing in the future.
Consequences of Defaulting on a Business Loan
Defaulting on an unsecured business loan can have severe and long-lasting consequences. For business owners, it’s crucial to understand these potential repercussions and to proactively avoid defaulting. Here are some of the key consequences:
- Damaged credit score. When you default on a loan, the lender will report it to the major credit bureaus. This can significantly lower your company’s credit score, making securing future loans or low interest rates much more challenging.
- Legal action. Lenders can take legal action against borrowers to recover the outstanding debt. If the court rules in the lender’s favor, it may seize the company’s assets or require ongoing payments.
- Personal liability. Depending on if you signed a personal guarantee and the structure of your business, you may be personally liable for business debts. If your business can’t repay the loan, your personal assets could be at risk.
- Strained business relationships. Defaulting on a loan can damage your reputation among suppliers, customers and other businesses. It can also signal financial instability, making it harder to negotiate favorable terms with suppliers or maintain customer trust.
- Increased interest rates and fees. If you default on a loan, you are still liable for the original debt. You also may face additional fees, compounding the financial strain on your business.
Taking steps to lessen the risk of defaulting on your loan can help avoid these consequences. Before taking out a loan, be realistic about your borrowing needs and repayment capacity. And if you run into trouble during repayment, communicate that to your lender before missing payments.
Related: Estimate Payments With A Business Loan Calculator
What To Do if You Can’t Pay an Unsecured Loan
If you can’t meet the repayment commitments on an unsecured business loan, don’t panic. There are steps you can take to navigate this while minimizing the potential damage to your business’s financial health and reputation.
Talk to Your Lender
When you’re unable to make payments, initiate a conversation with your lender. Be transparent with your lender about your business’s financial difficulties and discuss potential solutions. You can propose a revised repayment plan, ask for a temporary reduction in the interest rate or request a forbearance.
This strategy can show your lender you’re proactive and committed to repaying the loan, and may also prevent the loan from entering default. This can save you from penalties and credit score damage.
Talking with your lender can be a good option if you intend to repay the loan but are temporarily unable to do so.
Settle Your Debt
To settle an unsecured business debt, negotiate with your lender to agree on a lump sum payment that is less than the total amount the business owes. This option helps by eliminating your debt for less than what is due, thus providing immediate financial relief.
To start the process, you or another business representative (like a credit counselor or attorney) will negotiate with the lender with an offer to pay a portion of the debt in a lump sum. The lender may accept this instead of a total loss should your business default entirely. Once you reach an agreement, put it in writing before making the payment.
Debt settlement can dramatically reduce the total amount you owe, but it can hurt your credit score, as lenders typically report settlements to credit bureaus. Still, this option might be less damaging than going into default or bankruptcy.
Debt settlement is best if your business has accumulated substantial unsecured debt and is struggling to make even the minimum payments. It’s also suited for individuals or companies with access to a lump sum of money they can use for the settlement.
Take Out a Debt Consolidation Loan
A debt consolidation loan allows you to combine multiple debts into a single loan, usually with an extended repayment period and possibly a lower interest rate. These loans can simplify financial management and, ideally, reduce the overall cost of your debt. The best small business loans can help you consolidate multiple high-interest business loans into one with a lower interest rate.
To apply for a debt consolidation loan, gather information about your existing loans, including debts, interest rates and monthly payments. Then, apply for a loan equal to your current debt. If your application is approved, the lender will pay off your existing debts directly—or lend you the money to do so yourself. Once you consolidate the loans, start making repayments on the new consolidated loan.
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