When a person takes out a loan, they have every intention of paying the loan back again, both personally and in business. However, sometimes circumstances overwhelm a situation to the point that an individual can’t pay back their loan and may default on it, but what happens if you default on an unsecured business loan? Understanding what it means to default on unsecured business loans right off the bat can help you make smart and responsible choices going forward.
Curious About Unsecured Business Loans?
An unsecured business loan can be an unsecured small business loan or startup funding if you’re new and don’t have established credit or collateral. An example of a secured business loan would be an asset-based loan, wherein the borrower possesses forms of collateral, such as real estate or equipment.
You can use an unsecured business loan calculator to get an idea of what your unsecured business loan rates would be if you’re just starting and need a reference. Keep in mind that the average interest rate for a small business loan can vary depending on many factors.
To understand what happens when you don’t pay back a small business unsecured loan or startup fund, you need to understand what an unsecured business loan is.
What Is An Unsecured Business Loan?
An unsecured business loan is a loan that doesn’t require collateral from a lender. There are many options for acquiring an unsecured business loan, including getting an SBA loan. This is a government-backed loan that sets guidelines to reduce the risk for lenders.
What Are the Consequences of Defaulting on an Unsecured Business Loan?
Negotiation, assessment, and refinancing are all advisable courses before defaulting, but if these don’t pan out, there are a few unsecured business loan default consequences:
- The loan potentially getting turned over to a collection agency
- Legal judgment against you or your company by the lender
- Your credit score is negatively affected
Although an unsecured business loan includes no collateral, your assets may still be at risk, even ones that are not associated with the business. Putting your personal finances and possessions on the line is often a part of a personal guarantee you’re often asked to give when getting an unsecured business loan.
What Is Personal Guarantee?
A personal guarantee is a person’s legal promise to repay the money lent to them by an institution. It’s the promise given in the absence of a business’ assets, which is common if you’re a startup and lack such assets.
If the loan is not repaid, payments are missed, and defaulting occurs, then a personal guarantee permits lenders to appropriate assets available to them to compensate for the loan.
It’s never a good idea to default on any type of business loan. If unfortunate events have affected your business it’s always best to reach out to your lender to discuss possible options. This prevents putting your personal assets on the line and risking legal charges and a tarnished credit score. Properly assessing your circumstances before getting a loan can help avoid this situation. You can consult ROK Business Financing Advisors to navigate options before acquiring a loan and if you need further help to keep yourself on track.