What are the consequences of defaulting on a business loan?

Defaulting on a business loan generally has financial and legal repercussions for the borrower. When a business loan is defaulted on - the borrower does not repay the loan amount as per the loan agreement - the lender may take the following recovery actions:

1. Applying late payment penalties and additional interest charges on the overdue amounts.
2. Report to credit bureaus will decrease the business credit score and ability to borrow in the future.
3. Institute legal recovery actions to collect the outstanding amounts owed, this may lead the lender to seize the business's assets which would be classified as collateral.
4. Enforcing guarantees or co-borrower liabilities that will make guarantors liable to pay on the loan.
5. In extreme cases, the lender may initiate insolvency actions leading to bankruptcy proceedings against the business.

Defaulting on a loan can damage the business’s reputation and relationships with suppliers, partners and other stakeholders. It is vital, in instances when borrowers are facing some financial hardship, borrowers should keep lenders informed and begin discussions about loan restructuring or rescheduling loan repayments or potentially, requesting a moratorium period.

If borrowers act early and communicate frankly, they will limit the impact of default and may be able to save the business or maintain the lender relationship based on future loan arrangements.

Lenders may also use recovery agents to pursue overdue accounts which can create additional stress on the business. If borrowers consistently default, the lender may invoke loan acceleration by requiring the borrower to repay the total amount owing on the loan at once.