What Happens if You Cannot Pay Back Your Business Financing?

Small Business Financing | ByzFunder | Loan Default

We get it. Sometimes things get tough, and you don’t have the funds. However, failure to pay your lender as agreed upon after receiving business financing can cause you to go into default. The default can be immediately after a missed payment or months later, depending on your loan or financing terms and state or federal laws.

 

If you knowingly default on loans when you’re unable or unwilling to make payments, you risk your credit ratings and your chances of getting finance from other lenders. However, most people unintentionally miss payments due to not receiving late-payment notices as they have changed their address or contact information. 

 

Unfortunately, defaults aren’t an infrequent occurrence in the USA. According to recent statistics from the Bureau of Labor Statistics, the failure to pay for small businesses is 20% in year one, 30% in year two, 50% in year 5, and 70% in year ten. These stats are pretty daunting; however, you don’t have to be one of the businesses suffering from the consequences of defaulting. There are ways to protect your credit profile and business, and we have the answers below. 

Consequences of Defaulting on Business Financing

Your account could default after missing one payment; however, as mentioned above, this depends on your terms and the lender. If you miss several payments in a row without any effort to resolve them, your account could be considered delinquent. A statement that’s at least 30 days past due is generally regarded as delinquent. The implications and consequences of each term are different.

 

Business financing that has gone into default may be sent to the lender’s collections department or sold to a third-party collections agency. Going into default may result in your cash flow or tax refund being stripped if the lender or creditor decides to take legal action against your company to settle your debt. 

 

Mostly, you can recover from delinquency status by paying the overdue amount, including any fees or charges resulting from the case. Regular payments can begin immediately afterward. However, the default status is not as simple to remedy. It usually triggers the remainder of your loan balance due in full, ending the installment payments outlined in the original financing agreement. Unfortunately, rescuing or resuming the financing agreement is less likely once you default.

 

Your credit score is negatively impacted when you go into delinquency. Going into default reflects unfavorably on your score and consumer credit report, making it nearly impossible to borrow funds again. This includes personal loans, mortgages, and home insurance. Therefore you should always try to remedy a delinquency account before going into default status.

Credit Score Impact

Derogatory marks, including late payments, collection accounts, and defaults, can stay on your credit reports for up to 10 years. Even one late payment can damage your credit score.

 

Lower credit scores make it difficult to get approved for business financing or other financial products, leading to high-interest rates and unfavorable terms. That’s why it’s always best to pay your debt; even small increments can help to keep you in the clear. Be honest about your situation with lenders before you get to the point of no return.

How To Prevent Defaulted Loans

If you think you’ll be late with a payment, let the lender know ahead of time to see if they’ll work with you to make payments more manageable. If you agree to change the terms of your contract, it’s crucial not to breach those terms as this will lead to defaulting. You should also always understand the lenders’ terms and the implications of missed payments. 


How you prevent or settle a default depends on the lender, the type of financing, and your circumstances. Communicating all this is vital. Most alternative lenders will try their best to accommodate you if you are upfront and honest about your situation. Trying to dodge the problem ends up damaging your business even more.

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