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When you default on a business loan, a chain of negative consequences may be set into motion. Your lender may accelerate your loan, so instead of simply owing your outstanding monthly payments, you suddenly owe your entire loan balance. They may begin legal action to collect their money, which can include seizing business or personal assets. And they may report negative information to credit reporting agencies, causing damage to your business and possibly your personal credit as well.
If you're having trouble keeping up with business loan payments, take stock of your situation and contact your lender as soon as possible. Default typically happens when you're three to six months behind in your loan payments, but it can occur much more quickly depending on your lender and loan terms. By reaching out early, you may be able to work out a mutually agreeable resolution and minimize damage to your credit—and your business.
Are Business Loans Reported to Credit Bureaus?
Business loans appear on your business credit report and factor into your business credit score. The three primary business credit reporting agencies—Dun & Bradstreet, Experian and Equifax—receive information from lenders and credit card companies, public records, state filing offices, collection agencies and other sources. Business credit scoring models use this information to generate a business credit score that lenders and vendors may use to evaluate your business's creditworthiness.
Although your business credit report and score are different from your personal credit report and score—with information maintained in separate databases—some similarities apply. For example, your payment history factors significantly into your business credit score, just as it does with your personal credit. If you've been falling behind on your business loan payments, those late payments are likely bringing your business credit score down. If your business loan is in default or has gone to collections—or falling behind on bills leads you to file bankruptcy—these events will also appear in your business credit report and affect your business credit score.
Whether you have a loan in default or are just concerned about your business credit, you can benefit from checking your business credit report. You can check your business credit at any of the three major business credit bureaus for a fee. Learn more about what's in a business credit report and how it works from Experian Small Business.
Does a Business Loan Affect Personal Credit?
Under certain circumstances, a business loan default can also affect your personal credit. Here are three factors that may determine whether and how your business loan may impact your personal credit:
- How your business is structured: If you are a sole proprietor, your personal credit will almost certainly be affected by a business loan default.
- How your loan is structured: Even if you aren't a sole proprietor, your personal credit may be implicated if you used it to apply for your business loan. Personal guarantees are common for startup loans to businesses that don't have much of a credit history and for Small Business Administration (SBA) loans. If you're not sure whether your personal credit was involved in guaranteeing your loan, check your loan documents.
- How your default is resolved: If your loan default eventually leads to business bankruptcy and your personal assets are at risk, you may consider personal bankruptcy as well. Filing personal bankruptcy will, of course, have a major impact on your personal credit. You may benefit from consulting with an experienced bankruptcy attorney if you find yourself in this predicament.
Additional Consequences of Defaulting on a Business Loan
Damage to your business credit from defaulting on a business loan can have additional consequences. Having poor business credit will affect your ability to get loans and credit in the future—including credit lines from vendors—and that may make it difficult to operate or recover.
If your business loan was secured with business or personal assets as collateral, these assets may be seized and sold by your lender when your loan goes into default. Losing critical business equipment or real estate could spell the end of your business. Personal assets such as your home or personal bank accounts may also be at risk, again, depending on your loan agreement.
The SBA offers guarantees of up to 85% on SBA loans, which means your lender may be partially compensated if they can't collect from you. However, this does not prevent your lender from pursuing you for the debt or reporting late payments, defaults or collections to credit reporting agencies. And if the SBA does step in, you are still not off the hook. They will continue to pursue the debt with you—and may resort to tax liens and wage garnishment to collect their money.
Reach Out Early for Help
Figuring out how to proceed when you're unable to pay a business loan isn't simple. If possible, reach out to your lender before your loan goes into default. Because collections and legal action are costly for lenders as well, many will work with you to avoid default, possibly by restructuring your loan or accepting interest-only payments for a period of time. You may want to consult with a nonprofit credit counseling service, a debt settlement attorney or a bankruptcy attorney to help you navigate forward with as little damage as possible to your business and personal credit—and to help you chart the best future course for yourself and your business.