Most businesses need to borrow money at some stage in their lifetime. Whether it’s a start up loan, funding for new assets, or acquisition financing, a well placed spot of borrowing can really help businesses to grow.

No business ever plans on defaulting on a loan and of course, lenders are very careful about advancing money. Nevertheless, in 2020 business loan default in the US amounted to an estimated value of over $33.3 billion. Furthermore, all too often small business loan defaults can result in small businesses failing.

Business loan default can and does happen and so in this post we will take a closer look at it. Read on to find out what happens when borrowers default, what happens if you default on a business loan, what happens if you default on an SBA loan and the intricacies of a personal guarantee business loan default.

Overview of Business Loan Defaults

Firstly, the consequences of defaulting on a business loan vary depending on a number of factors. These factors include the type of loan, the size and terms of the loan as well as the individual lender. Additionally, differences between US state laws may also result in slightly different outcomes. However, what we have set out is a general guide that will be at least partially applicable in most cases.

So What Happens if I Default On My Business Loan?

When borrowers default on a business loan, the chances are that the lender will promptly instigate contact by both letter and telephone. Early default contact tends to be very courteous and cordial; usually the lender is simply hoping to speak with the borrower and get an understanding of what is going on.

Most lenders will remain relatively patient and will not even consider taking stronger action until at least 2 monthly payments have been missed in full. That said, whilst the early contact may seem amicable, the lender will still probably report the missed payments to credit referencing agencies and so your credit record will be impacted immediately.

Engaging with a lender early on can make a huge difference in what happens next. In many cases, the lender will be open to considering payment holidays, temporarily accepting reduced payments, and possibly even restructuring the loan.

Failure to engage with a lender may result in an ‘accelerated balance’ whereby the lender calls in the loan, and the entire amount outstanding becomes due. Failing to engage will also increase the likelihood of debt recovery action being taken.

Borrowers Default and Enforcement Action

If the default cannot be rectified and the borrower continues to miss payments, then sooner or later the lender will have to take enforcement action to try and recover the loan. The nature of this ultimately depends on the type of loan in place but in all cases the lender will seek their legal costs to be added to the debt and these can often be very high.

Secured Loan Default

If the loan is secured against business property, assets or business equipment, then the lender will probably issue foreclosure action to seize the collateral and then sell it in order to repay the loan. This can of course proves catastrophic in cases where the collateral for the loan is the business premises or essential business equipment.

Unsecured Loan Default

Where the loan is unsecured the lender has less immediate recourse available to them. Still, the lender will be able to issue court proceedings and seek a money judgement against the business, and in some cases against the owner personally.

Once the money judgement has been obtained the lender will then begin looking into various different enforcement options including sending bailiffs to seize business assets.

Personal Guarantee Business Loan Default

Many lenders will only issue unsecured business loans if the owner signs a personal guarantee. This means that the lender effectively has the legal right to hold the owner personally responsible for debts owed by the business.

Therefore the consequences of a personal guarantee business loan default are that the owner’s personal credit file will be impacted, and the lender will also be able to come after their personal assets including their savings and family home.

Small Business Loan Defaults

When it comes to the implications of defaulting, the size of the loan is not really a relevant factor. Legally, a default is a default and the lender has the same rights when chasing a $1000 loan as a $100,000 loan especially as there is no minimum amount for making someone bankrupt in the US. Basically even small business loan defaults can land you in some very hot water.

That said many lenders are reluctant to litigate for small balances and may be more patient in the event of a default. Some lenders may also be willing to write off small balances in exchange for reduced settlement payments.

What Happens if You Default on an SBA Loan?

Whilst these loans are ultimately backed and underwritten by the Small Business Authority, the funds are still provided by a bank and as such, SBA loan defaults are treated the same as any other. If the loan is secured (as SBA loans usually are) then the lender has the right to issue foreclosure action.

If the lender is unable to recover the loan from the borrower, then they will seek repayment from the SBA – the SBA will then have the right to take action against the borrower and its powers include the right to garnish wages and freeze bank accounts.