What Happens if You Default on a Loan for Your Business?


30 percent of entrepreneurs use loans to fund their businesses.

Are you one of these people? If yes, you made a smart decision. A loan, especially from a local bank or credit union, is an ideal source of startup and working capital. The interest rate is low and you’ll get an adequate amount of time to repay it.

However, it’s one thing to secure a business loan, and it’s another to repay it. A good number of borrowers end up defaulting on their loans.

So, what happens if you default on a loan for your business?

Keep reading to learn more.

Defaulting on a Secured Business Loan

Broadly speaking, there are two types of business loans: secured and unsecured loans.

When you take out a secured loan, you must provide collateral. This is typically the title of a valuable asset, such as your car or house. Secured loans are ideal for entrepreneurs who’re unable to get an unsecured loan.

If you default on a secured business loan, you stand to lose the asset you put down as collateral. If you secured an auto title loan, for instance, the lender has a right to repossess your car.

The same applies if you purchase business equipment through a financing plan. The lender can seize the equipment and sell them off to recoup their money. When this happens, your business’ operations will be impacted.

Dealing with a Debt Collections Agency

What if you default on an unsecured business loan?

In most cases, the lender will sell your debt to a collections agency, which will then take up the task of getting you to pay what you owe.

If you’ve ever dealt with a collections agency, you know how relentless they can be. From incessant calls to unending text messages, debt collection agents can be a real bother.

Yet, as an entrepreneur, you don’t need such unnecessary distractions. You need to focus on your business. You need to keep your eyes on the ball; otherwise, your business will lag behind.

Your Business’ Credit Score Will Fall

You have a personal credit score. But did you know your business also has a credit score?

Yes, businesses have credit scores. Lenders use your business’ credit to determine its creditworthiness. If your business has good or excellent credit, you’ll easily secure business loans at a low interest rate.

However, just as your personal credit takes a hit when you default on a personal loan, so will your business’ credit score when you default on a business loan. A bad or poor credit score makes it harder to get approved for traditional business loans.

The good news? You can easily prevent your business’s credit from getting worse by getting a consolidation loan, particularly if your multiple business loans. Be sure to get more details about debt consolidation before embracing it.

Now You Know What Happens If You Default on a Loan for Your Business

If you’ve been wondering what happens if you default on a loan for your business, now you’ve got a clear picture. Your business’ credit rating will fall and if the loan was secured, you could lose the asset used as collateral. Don’t let this happen to your business.

Keep reading our blog for more on business finance.

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