When You Can't Make Payments On Your Small Business Loan

Small business owners that cannot afford to make payments on their U.S. Small Business Association (SBA) backed loan are at risk of (1) being sued by the bank that made the loan or (2) filing bankruptcy. Banks prefer to settle or revise the terms of the loan in order to avoid default so small business owners should contact the bank as soon as they realize that they are unable to make payments.  

Failure to Make Payments

If your small business fails or your business is experiencing a decline in profits that cause you to fall behind in your small business loan payments, be aware that the bank may initiate legal proceedings against you to recover the guaranteed portion of the loan, which means the bank will sue you to either assume possession of collateral that was used to secure the loan or attempt to acquire any equity available. Even if the bank is successful in obtaining collateral or equity to partially pay the loan, you are still responsible for 100% of the loan balance and the bank can continue its efforts to collect the remainder of the balance.  Banks are quick to sue small business owners that default on their loans because they know that the failed business will have many creditors so they are trying to gain priority in the line of creditors.

Developing a Financial Plan

Small business owners that begin to experience financial difficulties should develop a financial plan prior to defaulting on their loan. If you are able to make a lower payment or need some other type of assistance, have a plan in place before speaking to a lender, which will help you plead your case for alternative financing. Communicate with your lender regularly by providing updates on your situation and establish a good relationship with the representative assigned to your account. Many lenders prefer to accept a settlement or even renegotiate the loan, especially if you contact them early, deliver on promises, and show that you are making a good faith effort to pay back the loan.

Considering Bankruptcy

In some cases, you may need to consider bankruptcy as an option if your business fails and there is no way to repay your small business loan. For some small business owners, filing bankruptcy may be a faster alternative if they are in severe financial distress because it can save the business and restructure debt payments. Be advised that once bankruptcy is filed, you will lose the ability to effectively negotiate with your lender as the bankruptcy court will intervene and apply its rules.