To begin with, unsecured business loans are the ones which are not secure against assets. In the case of a secured loan, the lender recoups their loss by possessing one’s secured asset. However, with an unsecured business loan, this recourse is unlikely. This is why unsecured loans usually have lower loan amounts with higher interest rates, preferably with shorter repayment periods.
Unsecured business loans can come to your financial help whenever you need money to fund your business growth and development. Whether one wants money to buy inventory, upgrade equipment, expand the workplace, market your company, or build working capital, paying a secured bank loan tops over paying an unsecured bank loan.
Otherwise, Defaulting on an unsecured business loan can lead to a cascade of consequences that profoundly affect both the borrower and their business. When borrowers default on these loans (A default refers to the inability of a debtor to make their required loan repayments), they trigger a sequence of events that can impact their creditworthiness, financial stability, and legal standing.
A loan default leaves a long-lasting blemish on your credit report, after which most lenders will be unwilling to grant you another loan. Because defaulting can make it more difficult for you to access funds in the future. So avoiding default in any situation should be your top priority. Further, what happens if you keep missing on your payments towards the indebting loan?
Loan default, (ie, you keep postponing your payment) also leaves a long-lasting blemish or cavity on your credit report, after which most lenders would not be ready to sanction you another loan. Since defaulting can make getting access to funds even more difficult than it was for one in the future, avoiding default should be one’s topmost priority in any situation.
As per the 2022 Small Business Credit Survey, 32 percent of small businesses had problems repaying their loans. Additionally, 28 percent of businesses surveyed applied for funding to pay off or refinance their existing loans.
What Happens if You Default on an Unsecured Business Loan?
Overall, defaulting on an unsecured business loan not only has immediate financial repercussions but can also have lasting effects on your financial health and business operations. One’s credit card score and report may be damaged (your business score card, and potentially, your personal score card could be blemished), ie, one of the immediate impacts of defaulting is a negative effect on your credit score.
This can make it harder to secure financing in the future and may affect other aspects of your financial life. Once a loan is more than 30 days delinquent, the lender can report the delinquency to the credit bureaus. When that happens, it will be more difficult to obtain loans and lines of credit in the future since missed loan payments and defaults stay on your credit reports for seven years.
Further, if you default on an unsecured business loan, it could lead to your entire loan amount becoming due. “The acceleration clause provision states that the entire loan balance becomes due immediately if the borrower fails to uphold certain requirements, such as making timely payments,” says Tayne.
Also, if the lender sends the debt to a collection agency, you may also be hit with collection fees (Such as you could naturally expect increased collection efforts, such as phone calls, letters, and potentially aggressive tactics from debt collectors trying to recover the amount owed). And worse yet, the lender can also initiate legal action against your company at this juncture, suing you for unpaid debts, which will cause you to incur court costs and potentially attorney’s fees as well.
Furthermore, not paying an unsecured loan could lead to loss of one’s personal assets (sometimes, all of it). Unsecured loan, though not backed by an asset or collateral (collateral here refers to an asset or assets that a borrower pledges to a lender as security for a loan. This security serves as a form of protection for the lender in case the borrower defaults on the loan, meaning they fail to repay it according to the agreed terms), but that doesn’t mean a lender is without recourse.
Often, when providing this type of financing, lenders require borrowers to sign a personal guarantee. This type of legal promise allows lenders to offset their risk and means that you are personally liable if your business defaults on the loan.
“Usually, a business owner’s personal assets are protected from any financial issues related to the business. That’s not the case with a personal guarantee, however, this is not the case with personal guarantees,” says Tayne. “This agreement allows the lender to seize the borrower’s personal assets if the company cannot satisfy the loan, including bank accounts, real estate and vehicles loan.”
In extreme cases, lenders may even go to lengths such as seeking to seize assets or place liens on property to recover their losses if one fails to repay the particular unsecured business loan on time.
What To Do If You Can’t Pay An Unsecured Business Loan?
Failing to repay a business loan can be a daunting situation, but it’s essential to take proactive steps to address the issue and minimize the consequences. If your business is facing financial hardship, making it difficult to make loan repayments as agreed, it is important to be proactive and try to find a solution that helps avoid severe consequences. It’s crucial to address this issue promptly and strategically to mitigate its impact on your business and personal finances, as well as present and future affairs regarding business loans and secured payments.
Firstly, it is important to communicate with your lender regarding the same as ignoring the problem and letting your loan payments slide and become delinquent will only result in harsher consequences that will be more difficult to reverse or you can say resolve the matter. Therefore, contact your lender as soon as possible to explain your situation honestly and transparently.
When you are unable to pay a business loan, it is important to contact the lender as soon as you realize there is a problem. The best unsecured business loans come from lenders willing to offer some assistance. This may include restructuring your loan, offering a moratorium or forbearance, or refinancing the loan. Discuss your challenges and explore potential options for restructuring the loan, future regarding your financial role such as extending the repayment period or temporarily reducing payments in the desired field.
Next, review your finances to thoroughly understand why you’re unable to make payments in time. Identify areas where you can cut costs, increase revenue, or reallocate resources to improve cash flow. Apart from seeking professional help such as hiring a financial advisor or a business debt counselor who can provide adequate guidance and counseling on managing your debt and negotiating with creditors so as to help you from being trapped by future financial repercussions. Further, it is important to prioritize your payments (especially if you are working to repay multiple loans) based on the consequences of non-payment and analysis of previous payment history.
Secured debts (backed by collateral) naturally have more severe consequences for non-payment compared to unsecured debts and one may consider paying a secure loan from then onwards. Further, it can advised to take out a debt consolidation loan preferably in the early stages of repaying your loan back.
As Tayne Notes – “If you don’t address the underlying issue that’s causing you to fall behind on loan payments, taking on a new loan that you can’t afford won’t help your situation in the end.”
This consolidation often comes with the potential benefit of securing a lower interest rate than what you may currently be paying on your various debts. This not only reduces the total amount you’ll pay over time but also lowers your monthly payments, providing immediate relief to your budget. Additionally, extending the repayment term through a consolidation loan can further ease financial strain by spreading out payments over a longer period.
Taking out a debt consolidation loan, such as a small business loan refinancing can help you recover your debt (without hurdling with complex EMI procedures), as through it, you are taking out a new loan, but since consolidation involves replacing existing loans with a single new loan, it may be the better option if you have multiple business loans. Ideally, through debt consolidation, you can get lower monthly payments or reduce your repayment time frame, or in some cases, both.
By adhering to the structured repayment plan of a consolidation loan, you can protect your credit score from the negative impacts of missed or late payments, thereby maintaining or improving your overall financial health. Ultimately, a debt consolidation loan offers a structured pathway to gradually pay down debts while simultaneously improving your financial outlook and reducing stress associated with managing multiple creditors and due dates.
Next, and one of the most important steps is to thoroughly restructure your debt. On restructuring your debt, you basically change the terms of your loan – which means you may be able to extend the payment period, which will lower your monthly payments, or you may be able to negotiate a lower interest rate to repay your loan amount in time. Moreover, restructuring can consolidate multiple debts into a single loan or payment, simplifying your financial obligations and making it easier to keep track of payments. It can also protect your credit score by ensuring you can meet revised payment terms, thereby avoiding defaults or missed payments that could negatively impact your creditworthiness. This is a particularly good option when you’re behind on payments (especially multiple payments), and it’s clear that there is no way you’ll be able to catch up and repay the past due balance and continue making payments if you proceed the same way as you are now.
Bottom Line
Defaulting on an unsecured business loan can cost the company a lot of time and money. Legal action against the borrower and negative impact on business credit history are consequences that persist in the business long after the payment is missed. To avoid defaulting on a loan:
- Contact the lender
- Make partial payments
- Consider refinancing options
- Work with a professional financial adviser/counsellor
Frequently asked Questions (FAQS) for What Happens If You Don’t Pay An Unsecured Business Loan –
What happens if I stop paying an unsecured loan?
Ans.- Your credit score may be damaged, and lenders will likely pursue collection efforts, including fees and possibly legal action.
Can unsecured loans be written off?
Ans.- Lenders can write off unsecured loans if they determine the debt is uncollectible, though legal responsibility may remain.
Can an unsecured loan be enforced?
Ans.- Yes, lenders can enforce repayment through collection efforts and legal action if necessary.
What happens when a business cannot pay its debt?
Ans.- It can face financial penalties, damaged credit, and potential legal action from creditors.
Can you go to jail for not paying a business loan?
Ans.- No, you cannot be jailed for failing to repay a business loan, unless it involves fraud or other criminal actions.
What happens if you can’t pay back a business loan?
Ans.- If you can’t repay an unsecured business loan, it can lead to serious consequences, such as the seizure of assets if you signed a personal guarantee. You risk damaging your credit, facing collection efforts, and potentially legal actions such as wage garnishment or asset seizure. But, there are just few things you should try before defaulting- If you can’t repay your debt, talk to your lender, consider a debt consolidation loan or restructuring your debt.
What happens if unsecured loan is not paid? OR What happens if I default on an unsecured business loan?
Ans.- If your business loan goes into default, the balance becomes due immediately. Lenders may also take legal action, & your credit score may suffer, affecting your ability to borrow in the future. Similar consequences as above shall happen, such as damaged credit, collection efforts, and possible legal actions from creditors.
Can unsecured loans be forgiven?
Ans.- Unsecured loans can be forgiven through negotiation with the lender, but this is less common compared to other types of debt.
How long can you be chased for an unsecured loan?
Ans.- The statute of limitations varies by jurisdiction, but creditors may pursue repayment for several years.
What if I can’t pay back a business loan?
Ans.- Communicate with your lender, explore restructuring options, seek financial advice, and understand your legal rights to manage the situation effectively.
Yours True Friend & Finance Advisor
Harry Bhagria
About Me... My interest in finance and business started early since childhood. I have extensive experience managing finances, running businesses and advising on loans. My expertise includes Credit Cards, Business Loans, Personal Loans, Vehicle Loans, Education Loans and the Stock Market. My main Objective, Aim & Goal of life is to share my knowledge with everyone, even those unfamiliar with finance, so they can understand how to effectively manage money and grow their wealth.... ....HARRY BHAGRIA....Know More in Detail...