Tayne Law Group

small business loan default

What Happens if You Default on a Business Loan?

Financing your business can be a daunting experience. Not only is it difficult to obtain financing, especially for new businesses, but it can also be stressful if things don’t go as planned and you struggle to repay what you owe. Small business loan default can occur if you go too long without making payments, and in many cases, it can damage both your business and personal finances. Here’s what you need to know.

What is small business loan default?

Defaulting on a business loan means that you’ve gone a set period of time without making your monthly payment. The timeframe can vary from lender to lender, with some more stringent than others.

For example, in some cases, you may be considered in default after missing just one payment. In others, it may take six months’ worth of payments before your lender changes your loan status from delinquent to default.

The term default signifies that you didn’t pay your debt obligation as originally agreed, and it can have a significant negative impact on you and your business.

What happens if you default on a business loan?

Unfortunately, there are a lot of different ways you can be harmed by a business loan default, not only professionally but also personally:

  • The lender may sue you: With many unsecured small business loans and business credit cards, you’re required to provide a personal guarantee to get approved. A personal guarantee means that if your business can’t repay the debt, you’re responsible for repaying it. If you can’t or simply refuse, the lender may choose to sue you and have a court order repayment.
  • You can lose personal assets: If you signed a personal guarantee or run a sole proprietorship, you’ll be required to use your personal assets to repay a small business loan default.
  • You might lose your collateral: If you used a small business loan to finance the purchase of equipment, vehicles, or other major assets, the lender may require you to secure the loan with the asset itself. If you default on that loan, the lender may seize the asset used as collateral to recoup its money.
  • It can damage your business and personal credit: A small business loan default can significantly damage your business credit, which will make it challenging to get approved for financing in the future. What’s more, many lenders will report a default to the consumer credit bureaus, which can also wreak havoc on your personal credit score.
  • Your bank account, wages, and tax refunds may be garnished: If the lender chooses to sue you, the court may allow it to garnish your wages or tax refunds to repay some or all of what you owe. The court may also allow them to garnish your personal bank account.

Throughout this whole process, interest and late fees may continue to accrue on the account, so the longer you wait to address the problem, the more damaging it can be.

What to do to avoid small business loan default

If you haven’t already defaulted on your business loan, there are steps you can take to avoid that awful fate and the negative impact it can have on you and your company.

Before you take out a small business loan, it’s crucial that you do your due diligence to make sure that you can afford to repay it. This includes creating a business plan, forecasting revenues and expenses, and the interest and fees that increase the cost of repaying the debt.

If you already have a loan and aren’t sure you’ll be able to make payments, contact your lender. While you may be worried about letting the lender know you can’t meet your obligations, it’s in both your interests to handle the situation early on.

In many cases, the lender can provide some relief, including a modified payment plan, forbearance, or a lower interest rate. This won’t reduce how much you owe in general, but it can give you the breathing room you need to get back on track.

Finally, if your business is in a position where it likely won’t be able to repay the loan, start looking at how you can keep up with the payments using your personal assets.

What to do if you’re already in default

If you’ve already fallen behind on your payments to the point where you’re in default, your lender may have already sold your debt to a debt collection agency. These agencies typically buy debt for pennies on the dollar, then try to collect the original balance.

In fact, you may have already started receiving calls from the debt collector. In this case, you’ll want to start by having the collection agency validate your debt. By law, collectors are required to send a written debt validation letter within five days of your first contact.

You’ll have the chance to dispute the debt within 30 days, but if it’s legitimate and belongs to you, you may be able to settle the debt.

Debt settlement is the process of negotiating with a creditor to pay less than what you owe. In many cases, you could save hundreds or even thousands of dollars. You can technically negotiate with a debt collector on your own. But it generally helps to enlist the help of a debt settlement company or law firm.

This is primarily because professionals have a deep understanding of how the debt settlement process works. They also know the tactics collection agencies will use to take advantage of consumers.

Additionally, someone who’s worked with debt collection agencies for years, such as an attorney, can help you understand and protect your rights.

If the collection agency has filed a lawsuit against you, it’s critical that you don’t ignore it. If you do, the court may enter into a default judgment against you, essentially giving the agency exactly what it wants.

Reach out to an attorney who can help you respond to the lawsuit and build your case. Even at this point, it may be possible to negotiate a settlement.

The bottom line

Small business loan defaults can have dire consequences if you’re not careful. While it’s best to avoid missing payments on your business loans in the first place, that can’t always be avoided.

If you expect to miss a payment, call your lender to try to develop a solution. Then do whatever you can between your business and personal finances to make good on your payments going forward.

If you’ve already defaulted, make sure you understand your rights during the debt collection process. Also, consider enlisting the help of a debt solutions law firm or a debt settlement company who can help you negotiate. The process could potentially help you save time and money.

If a collection agency has filed a lawsuit against you and is threatening to garnish wages, work with an attorney who can help you protect yourself and your assets as much as possible.

Tayne Law Group, P.C. has decades of experience working with debt collectors. Our attorneys can help you determine the best path forward based on your situation and your goals in a free consultation.


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