If you fail to comply with the terms of a loan by not meeting interest or capital payments by their due dates, then you could find yourself in default. The telltale signs that should alert you to the possibility that you are heading for default include:
- Not paying your bills on time, or juggling bill-paying each month
- Not knowing how much you owe
- Never having a positive balance on your overdraft account
There are serious consequences if you default on a loan and aggressive steps may be taken to collect this debt as soon as possible. These include:
- A damaged credit rating could prevent you obtaining credit to take out a home mortgage, purchase a car, or obtain business finance
- The entire amount of your loan may become immediately due and payable, and so make a bad situation worse, perhaps even fatal for your business
- Any assets the business may have could be seized
- If you are trading under limited liability, depending on how the default came about, you could become personally liable to repay the loan
- In the final resort, the business could be wound up and you could be made personally bankrupt if you have you assets tied to the business or have made personal guarantees
Working with your creditor
Putting off contact with your lender until the business is no longer economically salvageable implies that you did not adequately anticipate or prepare for your current financial difficulties. By contacting your lender early, you show you are aware of the financial troubles and have devised a programme that will improve the financial picture and keep the loan performing.
Lenders are likely to go along with a workout plan based on factors other than financial data. They look at the borrower's management team's honesty, integrity, and long-term business planning ability, track record and competency. All play a key role in a lender's decision-making process.
Two further points to keep in mind if you look as if you are heading towards default:
- Contact your main creditors if you are facing temporary problems in making payments. They may be willing to work out a modified payment plan that reduces payments to a more manageable level.
- If you are thinking about turning to a company that offers debt consolidation loans, debt counselling, or debt reorganization, investigate the company thoroughly before signing any agreement.