If you do not repay your business loan repayments on time, you will be charged additional late fees, a default fee and it will negatively impact your business credit and ability to raise funds elsewhere.
One or two missed repayments is often subject to a phone call, follow up email or letter, but not paying overall could lead to legal action and court injunction.
The consequence for missing a business loan repayment will depend on how long the payment is missed, whether the loan is secured or unsecured, and whether a personal guarantee is attached.
What Happens if I Miss a Business Loan Repayment?
If this is the first time you have missed a loan repayment, most lenders will contact you directly either by phone or email to find out why the payment was missed and to arrange for it to be made up – sometimes alongside a missed payment fee.
A missed business loan repayment can affect your credit score even if the issue is resolved quickly. This is one reason it’s worth contacting your lender as soon as you know a payment is going to be late, rather than waiting for them to reach out first.
Lenders are generally more flexible when a business is upfront about a temporary cash flow issue.
When Does a Missed Payment Become a Default?
A business loan is typically considered to be in default after a number of missed payments, and this number is set out in your initial loan agreement. Once a loan is in default, the lender can usually demand repayment of the full outstanding balance immediately, rather than continuing to collect it in monthly instalments.
Defaulting on a business loan is recorded on your credit file and can remain there for up to six years, making it harder to access business finance or credit cards during that time. It can also affect the personal credit score of any employee who provided a personal guarantee in the initial loan.
Is a Business Loan Secured Against My Assets?
This will depend on the type of loan. An unsecured business loan is not tied to a specific asset, which means the lender cannot automatically seize your business property if repayments are missed.
However, a secured business loan is different. The loan will be tied to a specific asset, such as equipment, machinery, or a vehicle. In this case, the lender does have a legal right to repossess that asset if the loan defaults.
Therefore, before taking out any secured lending, it’s worth being clear on exactly which assets are at risk, since this varies from agreement to agreement.
What is a Personal Guarantee, and What Does it Mean if I Fefault?
Many unsecured business loans, particularly for smaller or newer businesses, are approved with a personal guarantee from a senior employee. This means that if the business itself cannot repay the loan, the director who signed the guarantee becomes liable for the outstanding balance.
If a personally guaranteed business loan defaults, the lender can pursue the director’s personal assets to recover the debt. A personal guarantee also means the default can appear on the director’s personal credit file, separately from the business’s credit history. It’s one of the most significant risks attached to business borrowing, so it’s worth understanding exactly what you’re agreeing to before signing.
Can a Lender Take Legal Action Over an Unpaid Business Loan?
Yes, if a defaulted business loan remains unpaid, a lender can apply to the court for a County Court Judgment (CCJ) against the business, and against any individual who provided a personal guarantee. A CCJ is a court order confirming the debt is owed and requiring repayment; it’s recorded publicly and stays on the register for six years, making it difficult to obtain credit during that time.
If a CCJ is not paid, further enforcement action can follow, including instructing bailiffs, or applying for a charging order against property.
What Should I Do if I am Struggling to Repay a Business Loan?
The most important step is to contact your lender before payments are missed, or as early as possible afterwards. Most lenders would rather agree to a revised repayment plan, a temporary reduction in payments, or a short payment break than move straight to default and recovery action.