Navigating the Consequences of Defaulting on a Small Business Loan

If you have missed payments on your small-business loan, call your lender to avoid the consequences defaulting.

Explore the repercussions of defaulting on a small business loan and gain valuable insights into the common reasons behind loan delinquency in the business world. Discover effective strategies and practical tips to avoid defaulting and secure the financial future of your business.

When you take out a small-business loan, you intend to pay it back. But small businesses are risky, and missed loan payments happen. Here’s what you need to know about loan delinquency: why it happens, how to avoid it and what to expect if you cant repay.

Why small-business loan delinquency happens

Delinquency is when a borrower misses a loan payment or pays late. It can happen when businesses dont get paid on time by customers, lose large contracting jobs or experience theft or fraud, says Sid Jajodia, LendingClubs vice president of small business. Additionally, some businesses become delinquent during a dip in an industry or economic cycle; many construction companies were delinquent in 2009, he says.

Its never any one reason — businesses are complicated, Jajodia says.

What it means to default

Lenders consider loans in default after the loan is delinquent for a certain amount of time; the time period depends on the lender. On the whole, business borrowers tend to repay their loans, but online small-business borrowers fail to pay more often than other business borrowers. The rate of charge-offs (defaulted loans that lenders dont expect to be repaid) for business loans from all commercial banks peaked at 2.6% at the end of 2009 and is now less than 1%, according to data from the Federal Reserve Bank of St. Louis.

Online small-business lenders have slightly higher charge-off rates. OnDeck charges off a loan if the borrower hasnt paid after 90 days, according to the companys initial public offering filing with the U.S. Securities and Exchange Commission in 2014. OnDecks net charge-off ratio hit a high of 9% for loans originated in 2008 and then leveled out to roughly 6% in subsequent years, according to the SEC filing.

What to do if youre at risk for missing loan payments

Approach your lender, says Gregg Landers, managing director at financial services firm CBIZ. Lenders typically dont like surprises, he says. Some lenders are willing to work with at-risk borrowers to help them catch up on missed payments and get back on track.

If your lender is willing to work with you, there are tools they can use to help you avoid default, says Larry Chiavaro, executive vice president of First Associates, a loan servicing company. First Associates is the primary loan servicer for 15 online small-business lenders, Chiavaro says. Lenders may agree to accept partial loan payments for a few months until you can catch up, postpone your loan repayments until your business is cash positive, or extend your loan term to lower your monthly payments, Chiavaro says.

What to expect when you miss payments

Different lenders have different ways of servicing delinquent loans. Some lenders give borrowers a grace period to make up the missed payment with no penalties. If the borrower hasnt made the payment after, say, 15 days, the lender charges a late fee — typically around 5% of the missed payment amount or $15, whichever is larger. Beyond that, a lender may call a collections company to try to recoup the missed payments.

For OnDeck loans, repayments are automatically deducted from a borrowers bank account on a daily or weekly basis. A payment is considered delinquent when the borrowers account has insufficient funds when the company tries to deduct the payment. If possible, OnDeck works with borrowers to create an alternative payment plan with smaller payments and a longer term, according to a 2014 report by credit ratings agency DBRS.

Our goal is really to work with our customers to help them through it, says OnDeck chief marketing officer Andrea Gellert.

However, if OnDeck attempts to withdraw three consecutive payments with insufficient funds, the company stops the automatic deductions and considers the loan in default, according to the DBRS report. The company will continue collections efforts and pursue litigation if necessary to recoup the missed payments.

The consequences of a defaulted loan

Lenders will gradually become more aggressive with their collections strategy as loans become more delinquent. They report delinquent loans to personal and business credit bureaus, so your personal and business credit scores will take a hit, Chiavaro says. Dings to your credit score will make it harder to get a small-business loan in the future.

If you agreed to a personal guarantee in the loan agreement, or the lender has a lien on your business assets, the lender can seize your personal or business assets to recoup losses.

The bottom line

If you miss a payment on your small-business loan, lenders will generally be willing to work with you to rectify the situation, as long as youre communicative and forthcoming about the challenges youre facing. If you ignore collections calls, however, and dont make up your missed payments, the consequences for missing payments can become serious fast.

Thanks to Source: https://www.nerdwallet.com/article/small-business/online-small-business-loans-delinquency