What happens to a business loan if the business fails?

21 Oct 2021

As soon as a payment is missed, this is considered defaulting and lenders will still need their payment in full. Typically, it’s 2-3 payments before they find other ways of getting the payment from you. Depending on the type of loan you’ve taken out and the agreed terms you’ve signed, defaulting on a payment can mean anything from developing a poor credit rating, high fees and even having assets repossessed. We explore how you can avoid missing payments, what to do if you’re unable to pay and explore what happens to a business loan when a company fails.

Two female colleagues working with each other

What does defaulting on a loan mean?

When a business owner starts a company, they may not think about the worst-case scenario and what could happen if their business fails. Most businesses are set up to succeed, with owners applying for funding to help them trade, plan and grow. However, sometimes a business does sadly fail, leaving loans and other business outgoings unpaid.

Lenders consider a default on a loan as missing payments, and after 2-3 missed payments they report it to the credit agency who will keep track of any further missed payments. Missing payments can have a negative impact on your credit score which may impact any future applications for funding or credit too.

Meeting the legal loan agreement you take out with your lender,  means making regular repayments within the specified terms. If you can’t for whatever reason make payments, the lender will recoup the money owed through the means they outline in your legal agreement.

If you’ve got a business loan with a personal guarantee, the lender will automatically take the payment from them, causing further issues for you as a business owner and your chosen guarantee.

How to avoid missing payments on a loan

Here are some tips to help you avoid missing payments and keep that all-important credit score in check.

  1. Always set aside the right amount for the repayment - we all know how important cash flow management is, so make sure you set aside the right amount to make your loan repayments each month.

  2. Set reminders in your calendar - if you find it difficult to remember when your repayments are due, try setting reminders in your calendar to avoid missing payments. Alternatively, set up a direct debit from your business bank account for the loan repayments for a specific day each month.

  3. Speak to your lender - if you’re struggling to make a repayment, speak to your lender first before simply defaulting on your loan. Some lenders are happy to create a different payment plan to help you. This could be something like making lower repayments over a longer period. The key is to speak to your lender and come up with an arrangement that works for you both.

The most important thing is to act before defaulting on a loan repayment as the repercussions can be difficult to navigate and may impact your future eligibility for loans.

What you can do if you’re unable to pay

If for whatever reason you’re not able to make the monthly payments and you’re struggling with cash flow management, there are still options available to your business. It’s important to remember help is at hand. 

At Funding Options, we can’t offer financial advice, but there are several charities that can help with any debt issues including the Business debt line and Citizens Advice who will be able to signpost you to the right support. 

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Joe Morley
Joe Morley

Head of Unsecured Lending

Joe has worked in the alternative lending space since 2015. During this time he has helped hundreds of SMEs access millions in essential funding ranging from long-term asset-backed lending to short-term unsecured revolving credit lines and beyond. In his role, Joe manages and supports a large team of Credit Finance specialists.

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