What Happens If You Can’t Pay Back A Business Loan?

No business owner wants to default on a loan. Even though they don’t wish for their business to fail, unforeseen circumstances occur, and paying the loan might be an impossible feat for the time being. If you are in these shoes, you need not fret.

Even though you are not financially buoyant to pay, you need to get ready by first knowing the exact amount you have to pay. With a business loan calculator, you can get the exact total cost estimate.

Generally, there are four factors to consider with a business loan calculator: The borrowed amount, interest rate, loan term, and extra monthly payments.

Small business financing is not an easy task as it could be challenging to navigate. Several businesses depend on loans to survive and grow. This financing dependence is why small businesses face financial problems and are unable to pay their loans.

Possible outcomes of defaulted loans

When you default on paying a business loan, three possibilities can happen depending on your financing mode.

Unsecured Loans

No collateral is involved in unsecured loans. Hence, Lenders do not feel motivated to give these loans because the risk is great. Since there is no collateral, unsecured loans have reduced dollar amounts, shorter repayment periods, and high-interest rates. To be sure of how much you will pay back, you need a business loan calculator.

Most importantly, to get an unsecured loan, Lenders require a personal guarantee.

What happens if you can’t pay an unsecured loan?

Even though this personal guarantee isn’t exactly collateral, the lender takes over your assets to balance the loan if you cannot pay up.

Secured Loans

Unlike unsecured loans that need a personal guarantee, Lenders make it more specific when giving out secured loans. Normally, Lenders will request collateral with the same value as the loan. Sometimes, the collateral might have a greater value than the loan.

Common examples of these collaterals are real estate, homes, machinery, vehicles, etc.

What happens if you can’t pay a secured loan?

If you cannot pay a secured loan, some lenders will take it easy on you. They might suggest helping you find an effective solution. However, if it is impossible to pay back the business loan, the lender takes over the collateral.

Then, the Lender sells the asset to recoup their money. This is why the collateral’s value should be more than the loan’s real value.

However, you have to be careful that the collateral’s value conforms with the exact amount you were supposed to payback.

This is why you need your business loan calculator to provide accurate financial guidance.

Other effects of a Business Loan Defaults

The inability to pay back a business loan has a grave effect on your business credit score. Lenders will be wary of you and consider you as a top risk. If they give you a loan, it would have high-interest rates and short repayment periods and terms.

Asides from your business credit score, your personal credit score will be affected depending on your small business set-up.

Even though you didn’t predict your inability to pay the business loan at the start of your business, it is important to implement a good financial strategy at the beginning. This strategy will save you lots of problems moving forward.

To sum up

You must have a business loan calculator before you take any loan. Also, consider the integrity and structure of your business before you take any loan. You should speak with your partners and financial advisors on the best way to approach taking a business loan.

In addition, speak with the lender before receiving the loan on how they manage late payment and where you stand if you are unable to make payments at all. Some lenders will be open to a gentleman’s agreement with you before giving the loan.