Finder makes money from featured partners, but editorial opinions are our own. Advertiser Disclosure
A default occurs when you fail to make your monthly payments. It can seriously affect both your business and personal finances. If your business has defaulted — or is at risk of defaulting — get familiar with the potential consequences.
You and your business partners might be required to pay off the loan with your personal funds if you signed a personal guarantee.
How much you have to pay depends on the type of personal guarantee you have. In some cases, you might have to cover the total loan cost and any associated legal fees. Other agreements might cap how much you have to pay or split responsibility between owners based on the percentage of ownership.
A personal guarantee means that you’re responsible for repaying your loan if your business can’t. Lenders require this as a form of security — even on unsecured loans — to ensure that they will still be repaid even if your business goes under. There are two types of personal guarantees, so be sure you understand what your financial risk is before you sign any loan documents.
Your lender can come after your personal assets if your business is unable to repay its debts.
If your loan is secured and you’re a sole proprietor, a collection agency will likely be able to seize your personal assets along with your business assets to pay back your loan. If you secured your loan with personal property — like your house or car — this can be repossessed as well.
But even if it’s unsecured, your personal assets may still be at risk. Because most lenders require a personal guarantee, lenders can collect against your personal assets. You may also be required to pay additional fees, penalties and the cost of the lawsuit.
Default can be added to both your personal and business credit reports, lowering your scores. If your business is set up as its own distinct legal entity, then your personal credit score will be unaffected — but it will still hurt your business score.
The SBA will guarantee up to 75% to 85% of your business loan. When a lender can’t collect payments, the federal government takes over. The SBA will contact you and request that you either pay the rest of the loan amount or submit an Offer in Compromise within 60 days.
Failing to do either of these can result in the US Treasury Department to get involved. You and your business partners can have your bank accounts, wages and tax refunds garnished until the loan is repaid in full.
If you aren’t able to repay your business loan, make sure you know two things: The lender’s late payment policy and how it processes default. Check what your lender charges for late payments — and if you default, contact your lender’s customer service to see what steps it will take to collect on past-due accounts.
Chapter 11 is a flexible bankruptcy option for businesses. And while filing will restructure your debts and potentially eliminate them, it may risk your business’s reputation and working relationships with creditors.
This doesn’t make it a good choice for every business, but it can provide some financial relief if your business is struggling to pay its creditors. Speak with a financial advisor and learn more about Chapter 11 to be sure this is the right decision for your business’s debt.
Defaulting on a business loan isn’t the end of the world, but it can be a tough situation to get out of. And if you haven’t defaulted but may not be able to make payments, refinancing your business loan can help make your debt easier to handle.
Compare alternatives offering instant decisions and funding in one business day after closing.
Whether it’s heavy machinery, specialized medical monitors or new IT devices, equipment finance can provide the funding you need to maintain operations.
BHG Money is a nonbank lender that offers investment, debt consolidation, startup and healthcare-related loans to licensed professionals. Borrow up to $250K with minimal requirements.
Get multiple offers from this highly rated service, but watch out for strict repayment terms.
Find a $600K business loan and calculate the monthly payment before you apply.
Find the right lender for any purpose and calculate potential monthly payments.
Compare lenders your company can qualify for and calculate the cost before you apply.
Find a $40,000 business loan for your business and calculate the cost before you apply.
Find $50,000 loans for all purposes, even if you’re a startup or have bad credit.
Compare lenders and today and learn how to pick a provider that offers the kind of financing your business needs.
My loan terms were reviewed by an attorney and he told me that my business loan is not personally guaranteed. A bank agent called me and said he thought that it was and he urged me to visit the bank to discus. My question is ” Can a bank report a default of a business loan on my personal credit without proving that it was personally guaranteed?
Thank you
Hi Ed,
Thank you for contacting Finder.
Generally, business loans that aren’t personally guaranteed do not have any effect on your personal credit score. However, you should meet with your attorney again to review your loan terms and discuss your options — since we are only a general information service, we can’t provide legal advice. Hope this helps!
Sincerely,
Ezra