What happens if I take out a small business loan and then cannot make the payments when my small business fails?

Although your situation may seem fairly fluid, the fact of the matter is that if you fail to pay a small business loan, even if your failure to pay was due to your small business going under, there is a possibility that you could be sued by the bank that gave you the loan. Generally, banks will sue to recoup lost loan amounts, especially when it will help them regain collateral or other equity. By suing sooner rather than later, they are also trying to get ahead in the creditor line they assume will start forming against you.

Rising Small Business Default Rates

What happens when you are late for a short period, like 30 days, depends first on the terms of the loan and second on the source of the loan. Lenders these days are trying to curtail rising small business default rates. By mid-year 2010, the U.S. Small Business Association (SBA) small business loan, for instance, had a default rate of almost 15% of its outstanding loan guarantees. If you have an SBA-backed loan, your lender may well seek the guaranteed portion of the loan out of fear that it will get hit by the rapidly increasing default rates. For post-2008 loans, the potential loan amount was raised to 85%, but the terms may be more flexible than older loans, based partially on the amount(s) of collateral you pledged. But remember: even if your loan was guaranteed, you still have an obligation for 100% payback.

Developing a Financial Plan

Instead of just waiting to see what happens as you begin to have trouble paying your loan, develop a plan around your financing and cost-savings options beforehand. You want to have a plan in place before speaking to a lender. This will also help if you have a chance at alternative financing. Second, talk early with your lender, and pursue the best personal relationship you have there: it is usually in their best interests as well for you to succeed! Take advantage of that. But if you don't eventually make payment arrangements in some way with the bank, they will probably be forced to sue. Many lenders would prefer to take a settlement or even renegotiate the loan, this is especially true if you contact them early on and keep your other promises to them.

Considering Bankruptcy

In some cases, you may need to consider bankruptcy as an option for dealing with your small business failure and failure to pay your small business loan. This may be an attractive option, especially if you think you can save your business relatively quickly, so as to properly restructure your debt payments. Once you enter bankruptcy, however, you also lose much of the latitude in negotiating with your creditor. Try and make the best arrangements you can before being forced into bankruptcy. Remember, if you don't make some sort of payment arrangement with the bank, they will sue.