What happens to a business loan if the business fails?

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.