Business Loan Default: Why to Never Default on your Business Loan
From Merriam-Webster dictionary –
—used to describe something that happens or is done when nothing else has been done or can be done—usually used in the phrase by default—sometimes used before another noun
: a failure to make a payment (such as a payment on a loan)
Defaulting on a business loan is not an easy or comfortable position to be in. It often turns into downward spiral, and puts whichever SME owner at risk that banks, lenders and potential business partners will always stay away from him.
A default of loan is like the curse and mark of Cain. Something that never quite goes away, even for those whose ways are fully reformed.
Let’s start off by understanding what happens on the short-term when a business owner misses enough loan repayments for the lender to consider the loan as defaulted (each lender has its own criteria).
What happens when you default on a business loan in Australia?
When it comes to secured business loans, the recourse is much easier than with other types of loans. Since a secured business loan has a collateral – an asset that is used as a security for the loan – it is seized. If one has defaulted on his business loan and used his office space as a collateral, he will no longer own the office once his lender or bank has decide to use the collateral (as per the details of the agreement).
When it comes to unsecured business loans, lenders and banks have much less recourse. That’s why when a certain small business is behind on payments, the lender will tend to add more fees and bump up the interest but won’t be rushing to call this a “dead end” / default. When it does default, the debt will be passed over to a debt collection agency. Debt collection agencies have stringent regulation, but it can be a very stressful position to be in nonetheless (for the borrower who defaulted) – up to 3 phone calls per week, unlimited face to face contact, unlimited contact in the workplace… the debt collector’s sole purpose is to collect the debt and he would not hesitate taking extreme steps (view a 9News research about debt collectors).
What happens if I defaulted on a business loan which was made on my personal name with my personal property as collateral?
As expected, same as above. You should never do business in your name because that complicated everything. View the following video to learn more
How does defaulting on a business loan impact your business credit score?
When you default on a business loan, you are harming your business credit score – now and in the future. That is probably the worst consequence of the default, even worse than handling debt collectors – because it has long term implications for your current business and any other business you may open up in the future. It will mean banks will become very unlikely candidates to loan you money and that online lenders will categorise your business as high risk and will only agree to finance it for extremely high interest rates. To read more about the struggle of bad credit business loans in Australia click here.