There’s no shortage of ways to fund your entrepreneurial dreams and get your business off the ground. One of the most accessible ways is to apply for a small business loan since you can usually qualify with just a few basic pieces of information and a healthy credit score.
But managing that business debt may not be so easy — especially if your business is still young and income is fluctuating. A November 2023 report from Equifax found that small business loan delinquencies increased in nine of the 10 largest states in the U.S.
So what happens if you can’t pay back your small business loan and end up defaulting on it? Read on to find out more.
What we’ll cover
What is a loan default?
A default occurs when you’ve missed multiple loan payments. The default timeframe can sometimes vary based on the lender so make sure you carefully read your loan agreement to understand how many missed payments (as well as what other actions) can place you in default.
Before your account is in default, it’s usually considered delinquent. A delinquency occurs after your grace period from missing just one payment is over, but this can often be rectified by making the missed payment and paying any late fees. The length of your grace period can vary depending on the lender but it typically ranges from 30 days to 90 days.
What happens if you default on a small business loan?
Similar to your personal credit score, payment history is the single biggest factor in determining your business’s credit score. Since a default means you’ve missed several payments, your credit score will likely suffer significant damage.
That means your business could have trouble qualifying for future lines of business credit. However, some lenders may still extend your business credit even if it carries a less-than-stellar score. For instance, the Bank of America Business Advantage Unlimited Cash Rewards Secured credit card is one contender that’s meant for borrowers with low or no credit history. It’s a secured credit card, which means borrowers need to make a $1,000 minimum security deposit. The security deposit acts as their line of credit until you demonstrate good credit habits and can transition to an unsecured line of credit.
Bank of America® Business Advantage Unlimited Cash Rewards Mastercard® credit card
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Rewards
Earn unlimited 1.5% cash back on all purchases everywhere, every time.
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Welcome bonus
$300 statement credit after you make at least $3,000 in purchases in the first 90 days of your account opening.
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Annual fee
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Intro APR
0% Introductory APR on purchases for the first 9 billing cycles.
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Regular APR
18.24% to 28.24% variable APR
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Balance transfer fee
Either $10 or 4% of the amount of each transaction, whichever is greater.
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Foreign transaction fees
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Credit needed
There are also some strong business loan lenders on the market that are more likely to cater to borrowers with lower credit scores. Greenbox Capital is one lender that does this by offering secured business loans, which is the same idea as a secured credit except you aren’t making a deposit to secure your credit limit. Instead, you’ll be using an asset as collateral to secure the loan.
Greenbox Capital also considers factors other than your credit score when evaluating your application, like business revenue, cash flow, vendor payment history and years in business.
Greenbox Capital
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Types of loans
Term loan, business line of credit, invoice factoring, merchant cash advance
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Better Business Bureau (BBB) rating
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Loan amounts
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Terms
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Minimum credit score needed
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Minimum requirements
Must be in operation for at least five months
Pros
- Funding amounts between $3,000 and $500,000
- Borrowers could get funded in as little as one business day
- Applicants get connected with a Funding Advisor to walk through funding options
- Options available for borrowers with lower credit scores
Cons
- Repayment terms for collateral loans may err on the shorter side
Aside from the hit to your credit score, your lender may seek repayment for the owed balance. If you put up business or personal property as collateral, the lender may seize that property as part of your repayment.
If you had an unsecured loan where you didn’t put up any collateral, the lender may take you to court to find a way to settle the balance.
What to do after you default on a small business loan
First of all, if you’re not yet in default but are having trouble making your loan payments, it’s important to contact your lender immediately to see if you can work out a payment plan. Avoiding default in the first place is almost always better than trying to dig yourself out of trouble.
If you’ve defaulted and the damage has already been done to your credit score, there are still ways you can rebuild your credit over time. One of the key ways to accomplish this is by continuing to make all your payments on time and in full since payment history accounts for 35% of your credit score.
Using secured credit cards, like the Bank of America Business Advantage card mentioned above, can also help you rebuild your credit score since secured credit cards are meant to help you build healthy credit habits without putting you deeper into debt.
Also, be very discerning about when you seek out new credit. While diversifying your open lines of credit can actually help your credit score, applying for too many new lines of credit around the same time can actually hurt your score. This is especially important when borrowing money for your small business since you also want to make sure you have enough money coming in to pay off your balances.
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Bottom line
While you won’t necessarily default on your small business loan immediately after missing a single payment, it’s important to make sure missed payments don’t become a habit. If you go into default, your credit score can be negatively impacted and you’ll have a harder time qualifying for future lines of credit for your business.
Even if you worry that the damage has already been done to your credit score, taking the right actions can help you build your score back up.
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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of small business products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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