What happens if you default on an unsecured business loan?

The ramifications of defaulting on an unsecured business loan could be far-reaching. Because there is no underlying security for the loan, lenders have several avenues of recourse to collect the outstanding amount. Lenders start by sending legal letters and/or proceeding with some form of recovery process by going to the courts. Your credit score will take a hit, making it costlier and harder to obtain credit in the future. Lenders may also inform credit bureaus of the default which will impair your personal and business credit profiles. Given the unique aspects of commercial finance, lenders may even seek payment from any personal guarantors or co-applicants. In addition, repeated defaults on an unsecured loan enables lenders to seek asset replevin action arising from the court's ruling. In short, whatever the nature of the loan, if you start defaulting, reach out to the lender as soon as possible at the first sign of disconnection. While lenders may not always be sympathetic, many lenders will have some lapse programs to assist borrowers as well as options for restructured loans or at least temporary relief. You should always review your loan documentation; to understand the nature of the penalties and consequences of default, particularly in the secured creditor context before signing anything.

Once you default and your credit score drops, it will be more difficult and costly to obtain new loans or credit cards. Default may result in added fees, and higher interest rates meaning you may pay higher amounts in interest and make it all the more difficult to recover on any debts.