Default is the condition wherein the lender assumes that the borrower is not capable of continuing repayment.
Reasons for non-repayment are:
- income struggle
- miscalculation of projection
- emergency reasons
- or simply the borrower has no intention of continuing the repayment anymore
That status will be declared and the borrower and their company will be added to the default list. This will have an impact on their credit score and credit history for many years to come.
What Happens When You Default On Small Business Loans?
A missed repayment or two can have a big effect on your loan term, and even on your credit score. But it does not necessarily mean it will automatically go to a default. Some lenders may give grace periods to give you ample time to recover and repay. If the borrower is not able to continue the repayment, the lender will assume that your loan will go into default. Then that is the time that lenders may take necessary measures to compensate themselves for your unpaid obligations.
If Your Loan Has Collateral
When default status is declared against a borrower, this is where the collateral plays its role. This is one of the first things that the lender may liquidate to compensate for their loss. Technically you cannot do anything to prevent this. So try your best to avoid going into default and experiencing the painful loss of the assets used as collateral.
Personal Guarantee
A personal guarantee is sometimes being required or sought by lenders. This is for their own security. They are fully aware that business loans do not always end the way they should. If a loan term turns sideways, they will have something to look forward to.
A personal guarantee is of two types. The first is the limited guarantee to which the lender and borrower set an agreed limit to which the borrower is obligated to pay when the loan turns into default. The amount obligated is smaller than the total amount of the repayment agreement. The second one is the unlimited guarantee. The remainder of the total debt from the loan agreement, and other fees incurred because of default, will be obligated to the borrower. That’s when the lender takes your assets and sells them to compensate for the non-payment of your debt.
Legal Action
This is one painstaking thing that a borrower may experience. It’s one of the last options for the lender if the borrower can not pay his debt. Lenders may sue the borrowers and from there, legal action will be taken.
Final Take on this Topic
A repayment agreement turned into default may have a number of consequences that impact the borrower. One of the most common is the borrower’s name or company will be put down on the default list. That will have a great impact on the financial reputation of your company. It will produce a reduction in your credit score and a red flag against your credit history. This will eventually create havoc in the future when you are again able to apply for a loan. So be sure that whenever you decide to take a loan, take into consideration your projection of profit and repayment capability. This is especially important when your company experiences struggle in income generation. Prioritize debts once you decide to have them.
