What Happens When You Default on a Loan?

Share This Post

Key Takeaways

If you fail to repay your loan, lenders will give you several chances before you go into default. Lenders will typically send email notices, make calls, and take other steps to remind you to repay your loan.
Once you go into default, you may face severe legal and financial consequences. However, most lenders are willing to work with you to help you avoid these outcomes.
Defaulting can lead to penalties and legal action, wherein the lender takes the necessary steps to seize and sell your business assets. If that is not enough to recoup losses, the lender will go after your assets as the business director and can pursue further legal action.
Borrowers have plenty of options to avoid defaulting, like negotiations, refinancing, debt consolidation, and more.

Nobody takes out a business loan intending to default on it. However, running a business is unpredictable. Many issues can arise that can prevent a business from making timely repayments. Reasons can be personal or economic, and sometimes, the unexpected just happens.

There can be serious consequences when your loan defaults; you should understand the implications of not successfully repaying a loan before agreeing to take it out.

Read on to learn what happens when you default on a loan:

What is a Loan Default?

A loan default happens when you fail to make the scheduled repayments on a debt obligation for an extended period, violating the agreed terms of the loan contract.

If you miss a loan repayment by a few days, you will most likely not land in long-term trouble with many lenders, provided this is not a repeated behaviour. However many business lenders will consider you in default if you miss a payment by a single day.

When a payment is missed most lenders will take several actions to try and avoid initiating a legal process.

Typical first steps from lenders are emailing, messaging, and calling to discuss the missed payment. They’ll be seeking to understand why the missed payment occurred and make an arrangement .

If you truly cannot pay the loan despite all efforts, the lender can take escalating actions that can result in court action, loss of security, and a severely impacted credit file.

What Happens When You Default on a Business Loan?

Defaulting on a business loan can have serious consequences, both for the business and its owners. Here are some of the key repercussions:

Issuance of a Statutory Demand: The lender can issue a statutory demand, a formal legal notice that gives you up to 21 days to settle your outstanding debt before legal action is taken and the business is deemed insolvent.

Winding Up of Business: Prolonged inability to meet debt obligations can lead to insolvency. This may result in the winding up of the business through the court.

Sale of Business Assets: The lender can start the legal process of selling your business assets as a mortgagee in possession. The lender will sell your properties until their losses are covered.

Personal Liability: The guarantor for the loan, usually the business director, will be liable to pay whatever cost is not covered by selling business assets.

Disruption to Business Operations: Losing essential assets, like machinery, can severely disrupt business operations and impact revenue generation. If the security is directly tied to how the business makes money (e.g. a road freight business’s trucks), defaulting on a secured loan means a complete halt in business operations.

Damage to Credit Rating: The business’s credit score will suffer, making it difficult to obtain future financing. The guarantor’s personal credit score could also be negatively affected. If your business does secure financing despite a record of default, future loans may come at higher rates and shorter terms.

Operational Challenges: Defaulting on a loan can strain cash flow, making it difficult to meet other financial obligations. Additionally, relationships with suppliers, vendors, and other stakeholders may be damaged as your business’s reputation takes a hit.

Bankruptcy and Business Closure: As a last resort, if your business cannot meet its debt obligations, you might file for bankruptcy. Bankruptcy can provide some relief but also involves a formal process and long-term impacts on your creditworthiness.

Avoiding Loan Defaults

Defaulting should always be an absolute last resort. This outcome is something neither you nor your lender wants, so you have lots of options to avert it. Here are some actions you can take to avoid going into default:

1. Communicating Proactively with Lenders

As soon as you anticipate trouble making payments, talk to your lender about getting temporary relief. Most reputable lenders are willing to work with struggling borrowers to avoid defaults. Through open communication, here are some solutions you can ask for:

Loan restructuring: Extending the repayment period, reducing the interest rate, or altering the payment schedule
Repayment Holiday: Negotiating a payment holiday, a period during which no payments are required
Extended Grace Periods: Extending the grace period before payments are required, providing more time to stabilise the business.
Waiver of Fees: Waiving or reducing late fees, penalty charges, or other fees associated with the loan

2. Refinancing or debt consolidation

If you’re struggling to make repayments, you can consider refinancing. This involves taking out a new loan to pay off and replace the delinquent one, potentially at better rates. You can also consolidate all your debts, like lines of credit, term loans, and tax debts, and pay them off with a single loan with better terms.

3. Improve Business Finances

Take steps to improve your business’ finances to increase income and manage repayments. You can do this in conjunction with a repayment holiday or deferment. While you’re not making repayments, do what you can to increase cash flow, including:

Implementing strategies to increase sales (promos, discounts, etc.)
Collect unpaid invoices from customers
Enhance efficiency in your daily operations
Cut non-essential costs and reduce spending to just the essentials
Negotiate with suppliers for better terms
Sell off other unused or non-essential assets to generate cash

4. Seek professional advice

If you’re in a very risky situation, it helps to consult different financial professionals to help you find a solution. You can look for debt counsellors or experts in insolvency to understand your rights and make informed decisions. You can also consult loan experts like Dark Horse Financial for advice on refinancing, restructuring, or debt consolidation. The key is taking action quickly before accounts slip into default status and fees, penalties, and legal exposure rapidly escalate.

Recovering from Default Consequences

While defaulting can feel devastating, it is possible to recover over time by taking the right actions. Here are some ways to do it:

Pay off or settle outstanding debts to reduce the debt burden and improve credit scores.
Focus on clearing delinquent debts before taking on new financing.
Make all future payments on time to demonstrate improved financial management.
Develop and adhere to a strict budget to control spending and manage resources effectively.
Maintain open and honest communication with creditors, suppliers, and investors about the recovery plan and progress.
Demonstrate commitment to fulfilling obligations and restoring financial stability to regain trust.

Avoid Defaulting with the Help of Loan Experts

If you’re in financial trouble and you think you’re about to default on your loan, it’s time to consider different solutions that can get you back on track. Refinancing and debt consolidation are some loan solutions that can help you successfully manage repayments and recover from your financial setback.

More To Explore

Commercial plumber with red hard hat poses in front of pipes, arms crossed, smiling at the camera

Case Studies

Case Study: $1.1M Private Loan to a Commercial Construction Business

Prior to COVID, our client had a thriving commercial plumbing business. Like many in the industry, the pandemic hit hard, with reduced contracts and delayed payments leading to financial strain. However, as the market picked up again post-COVID, their numbers began improving steadily. Still, the burden of the pandemic remained in the form of costly, self-sourced loans that created a significant drain on their cash flow. On top of this, the business had accumulated $1M in tax debt. The client was faced with two potential solutions: consolidate their existing debts into a more manageable loan or consider restructuring the business entirely. With the future looking brighter for their business, consolidation became the preferred choice. Their turnover and cash flow were strong enough to support a $1.1M unsecured loan over five years. However, while loans of up to $250,000 can sometimes be obtained without the need for extensive documentation, larger loans – particularly unsecured ones – typically require financials. The company’s financials had taken a hit during the pandemic, and with losses on the books, the unsecured option was off the table. The Tailored Solution: Secured Loan with Capitalised Interest Recognising these challenges, we adopted a two-step approach to provide the client with the financial relief they needed. First, we secured a $1.1M first mortgage loan, backed by property as collateral. By securing the loan against property, we were able to access a more flexible and favourable lending option that allowed the business to maintain liquidity. One of the key features of this solution was the decision to capitalise the interest on the loan. This strategy meant that the interest accrued on the loan was added to the loan balance rather than requiring regular interest payments to be made. For the client, this provided two key benefits: Cash Flow Relief: By capitalising the interest, the client was able to redirect their available cash flow to more pressing business concerns, including paying down their $1M tax debt. This approach allowed them to stabilise their financial situation without the immediate strain of servicing both the tax debt and the loan simultaneously. Flexibility for the Future: The capitalised interest approach also created breathing space for the business to recover from its pandemic-related losses. By the time the interest needs to be repaid, the business is expected to be on even firmer financial ground, with stronger cash flow and better financials. This would enable them to refinance the loan or even explore unsecured lending options once their financial situation improves. Why This Loan Was the Right Fit In this case, the combination of a first mortgage loan with capitalised interest was crucial in allowing the business to address its immediate challenges while providing room for future growth. Here’s why this was the ideal solution: Secured Loan with Lower Interest Rates: By securing the loan against property, the business was able to access a loan with a lower interest rate than would have been possible with an unsecured loan. This ensured that the overall cost of borrowing was manageable, despite the larger loan amount. Avoiding ATO Enforcement: The capitalisation of interest gave the business the breathing space it needed to focus on paying off its tax debt. This is significant because it helped them avoid any potential enforcement action by the Australian Tax Office (ATO), which could have included garnishing accounts or placing liens on assets. By proactively managing the tax debt, the business was able to maintain control over its financial future. Improved Financial Outlook: The structure of the loan was designed to align with the company’s projected financial recovery. With turnover increasing and cash flow stabilising, the business is expected to be in a much stronger position within a year. At that point, they will be far enough removed from the loss-making pandemic years to consider refinancing the loan or transitioning to an unsecured option with more favourable terms. Key Benefits of This Approach Preserving Cash Flow: Capitalising interest allowed the business to preserve its cash flow for day-to-day operations and critical payments like tax obligations, which was vital to its continued operation and recovery. Future Flexibility: This strategy provided the client with a clear pathway to financial recovery. After one year, the business could refinance the loan under more favourable terms or secure unsecured financing once they’ve demonstrated improved financials. Tailored Solution for Unique Challenges: This loan was structured with the unique challenges of the business in mind. The post-COVID recovery created an opportunity for growth, but also highlighted the need for a financing solution that wouldn’t strain the business’s resources. A first mortgage, combined with capitalised interest, was the perfect balance between providing necessary capital while keeping short-term obligations low. Strategic Debt Management: By choosing consolidation over restructuring, the business retained full control over its operations while addressing its debt obligations. This solution also ensured that their tax debt was managed, reducing the risk of future penalties or enforcement action. In conclusion, this case study demonstrates how a strategically structured loan – even a secured one – can create substantial value for a business, especially when navigating a post-crisis recovery. At Dark Horse Financial, we understand the need for tailored financial solutions that don’t just solve problems but also enable businesses to thrive in the long term. Related posts: Case Study: An Unsecured Business Line of Credit Can you consolidate your business debts? (A Case Study) Increase Supply Chain Efficiency with Trade Finance Case Study: $75k Overdraft Limit + $40k Capital Raise Secured Against Equipment (No Property Security)

30 September 2024

Doctor with crossed arms smiles directly into camera, smiling doctor, photo with out of focus background, concept photo for doctor who got approved for a medical business loan

Blog

Financing for Doctors: Medical Business Loans, Personal Loans, and more

Key Takeaways Doctors are considered low-risk borrowers by many lenders. Thus they have access to a wide range of financing options with competitive interest rates, flexible terms, and high loan amounts to support both business and personal financial needs. Some reasons why doctors need loans include purchasing commercial property, purchasing equipment, securing working capital, debt consolidation, further education, and more. Medical business loans are versatile loan products that can cover a range of business expenses, including staffing, marketing, and emergency expenses. Medical practice loans are ideal for doctors looking to acquire, expand, or renovate a medical practice. Medical equipment loans are for purchasing or leasing medical equipment, and helping doctors stay up-to-date with the latest technology without draining working capital. Doctors can access personal loans for managing personal expenses, debt consolidation, home improvements, or continuing education. As a medical professional, assess your needs and carefully compare lenders before committing to a loan. Doctors face unique financial needs, whether they are setting up their medical practice, expanding it, or purchasing new equipment. Fortunately, various tailored financing options are available to healthcare professionals. Understanding these loan types can help you secure the right kind of funding for your medical business or personal financial goals. Let’s explore the types of loans for doctors, including medical business loans, medical equipment loans, and more. Get a quote Why Doctors Need Financing Doctors often need financing for a variety of reasons, both for professional and personal needs. Some of the most common reasons include: Starting a New Practice: Setting up a new medical practice involves significant upfront costs, including leasing office space, purchasing equipment, and hiring staff. Financing helps cover these initial expenses. Expanding or Renovating a Practice: As patient numbers grow, doctors may need additional space, more advanced technology, or enhanced facilities, which require substantial capital. Purchasing Medical Equipment: Medical equipment, such as diagnostic machines, surgical tools, or patient management software, can be expensive. Equipment loans allow doctors to finance these purchases without depleting their cash reserves. Practice Acquisition: Many doctors buy existing practices or partner with other healthcare providers, which often requires financing for the acquisition costs. Working Capital Needs: Running a medical practice involves ongoing expenses like payroll, utilities, and supplies. Financing helps ensure smooth cash flow, especially during periods of irregular income. Debt Consolidation: Personal or business debts can be consolidated through loans with lower interest rates, helping doctors manage their finances more effectively. Continuing Education or Certifications: Doctors often need to pursue ongoing education to stay current in their field. Financing helps cover the cost of courses, certifications, or attending professional conferences. Types of Loans for Doctors Doctors in Australia can access a number of loans to address their needs, whether for their practice or for personal purposes. Here are the most common ones: 1. Medical Business Loans Medical professionals can explore general business loans for any needs concerning their medical business. These loans can cover common costs like working capital, inventory purchases, marketing, hiring, and more. Types of Business Loans for Doctors: Secured Business Loans: Doctors can opt for secured loan options for any business purpose. If you need long-term financing and have significant assets to use as security, you can go for a secured loan. This is best for more significant costs like business expansion. Unsecured Business Loans: If you need a quick source of funding with minimal requirements, you can go for unsecured business loans. These loans are more short-term and can be approved as fast as 24 hours. Business Line of Credit: A renewing line of credit can help doctors manage the daily operations of their business, including paying for payroll, utilities, emergencies, and more. A line of credit has a predetermined limit you can draw from at any time. When you repay, the limit resets. You only need to pay interest on the borrowed amount, not the full limit. 2. Medical Practice Loans If you’re focused on the specific needs of starting or expanding a medical practice, you can go for specific loans that address those needs. Medical practice loans help doctors acquire or upgrade their practice with minimal hassle. Why Opt for a Medical Practice Loan? Whether you’re buying into an existing practice or establishing your own, the upfront costs can be significant. Medical practice loans are tailored to help doctors cover costs like: Purchasing Property: If you’re starting from scratch, the cost of a commercial or office space can be your biggest expense. The right loan can cover this cost. Acquiring an Existing Practice: If you’re buying an existing practice, it requires significant capital to do so. Medical practice loans can cover the purchase price. Renovations and upgrades: If your practice needs modernisation or expansion, these loans provide the necessary funding. Common Types of Loans for Acquiring and Upgrading a Medical Practice Commercial Property Loans: Medical professionals can access commercial property loans for the specific purpose of buying commercial space for their practice. These loans can cover the purchase or building of a commercial space. Fitout Finance: These are loans tailored specifically for the improvement of a space’s interiors, including electrical, plumbing, lighting, structural, and interior design. 3. Medical Equipment Loans The medical field is technology-driven, and keeping up with new advancements can be expensive. That’s where medical equipment loans come in. These loans help doctors finance the purchase or lease of medical equipment without depleting their working capital. What Is Equipment Finance? Equipment loans are designed specifically for the purchase of business equipment. For healthcare professionals, this type of financing is used to purchase advanced medical technology and equipment. These loans allow doctors to spread the cost of expensive machinery, diagnostic tools, or even general practice equipment over time. Benefits of Medical Equipment Loans Get Immediate Access to Equipment: With equipment finance, doctors can get medical equipment immediately, allowing them to provide better patient services sooner. Preserve Working Capital: Instead of paying for equipment upfront, you can spread the cost over a fixed period. Access to Cutting-Edge Technology: Stay competitive by

25 September 2024