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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

Defaulting on Your Business Loan: Effect on Your Credit

Defaulting on Your Business Loan: Effect on Your Credit

Defaulting on your business loan will trigger a series of negative consequences. It might accelerate the loan, making you owe the entire loan balance rather than what is outstanding for each month. There could be legal action for the money, including the seizure of personal or business assets. Also, such adverse action might get to credit reporting agencies which might smear your business negatively. 

For people with issues keeping up with their business loan payments, make sure to get in touch with your lender. While the typical time frame for default is three to six months after you are behind on your loan payment, it might be fast-tracked based on your lender and loan terms. As a result, reaching out on time makes it possible to develop a solution that suits both parties and reduces damage to your business and credit.


Will the Credit Bureau know of My Business Loans?

Your business credit report will reflect your business loans, and it will affect your business credit score. The central business credit reporting agencies: Equifax, Experian, and Dun & Bradstreet, get information from public companies, credit card companies, public records, lenders and other sources. Credit agencies will use this data to create a business credit score with which lenders can examine the creditworthiness of your business.

While your business credit score and report are not similar to your personal report and score, there are some similarities. For instance, your payment history will significantly affect your business score, the same way it affects your personal credit. Such late payments might make your business credit score take a hit for people behind on their business loans. In case your business loan is in default or is in collection, or you are behind on a bill that warranted bankruptcy, your business credit report will reflect all these, which will affect your credit score.


Will a Business Loan Impact Personal Credit?

There are cases in which a default business loan will also impact your personal credit. We discuss three factors that will reveal if and how any business loan might affect your personal credit: 

  • The structure of your business: a sole proprietor’s business credit will indeed affect the personal credit if there is a default on a business loan. 

  • Your loan's structure: you might not be a sole proprietor, but your personal credit will take a hit if you use it when applying for your business loan. This is pretty common for startup loans since such a business does not have much credit history.

  • The way your Default was resolved: In cases when your loan default led to business bankruptcy which put your personal assets at risk, one might consider personal bankruptcy. When you file personal bankruptcy, your personal credit will take a significant hit.


The Consequence of Defaulting on Business Loans 

Defaulting on business loans will not only damage your business credit score but also trigger some boomerang effect. Without a doubt, poor business credit will severely affect your chances of getting loans and credits in the future, which could affect your business’s operation and recovery.

If you secured the business loan using business and personal assets as collateral, your lender might seize and sell such assets when the loan goes into default. When you lose real estate or essential business equipment, it can be the end of your business. Depending on the terms of your loan, personal assets like a home or personal bank account might also be at risk.


Get help on Time 

When you cannot pay your loan on time, deciding what to do many times is not easy. This makes it essential to contact your lender on time before the loan gets to default. Since it is costly for lenders to have collection actions, many will be willing to cooperate with you to avoid default. This might happen via loan restructuring or settling for interest-only payment for a short period. 

It is a good idea to get in touch with a nonprofit credit counseling / service, a bankruptcy attorney, or a debt settlement lawyer to help you move with minimal impact to your business and personal credit card. They can also help you structure the best future course for you and the business.



Jim McClaflin, EA, NTPI Fellow, CTRC
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