Most responsible lenders will do their best to make sure they only loan money to businesses who are likely to be able to afford the repayments. They do this by assessing the health of your business.
In most cases, they get it right – the business gets their funding and repays the loan in full. But what should you do if you find yourself unable to pay back your loan?
Contact the lender
If you don’t think you’re going to be able to keep up with your repayments, your absolute first step should be to contact the lender as soon as possible. Getting in touch with them early means you’ll both be able to plan what happens next.
Many lenders will be understanding and may be able to give you certain concessions while you get your finances back in order. For example, they may agree to give you some extra time to make repayments.
Even if you think your financial problems are long-term and may still get worse, involving the lender at the earliest opportunity is still a good bet.
Refinancing is basically the practice of taking out another loan to pay off your current loan. Ideally, the new loan will come with either a lower interest rate or lower monthly repayments (for example, it might be longer term so the repayments are spread out).
Once the original debt is paid off, you just have to make sure you keep up with the repayments on your new loan.
If you think your business’s financial situation is going to get worse, refinancing might not be the best solution; all you might be doing is delaying the inevitable. So make sure taking on more financing won’t exacerbate your problems first.
Prioritise your debts
Not all your business’s debts will be equal. Being late in paying back one debt may have greater implications than being late with another. If you’re struggling to keep up with your repayments, have a sit down and try to work out which of your outgoings must take priority.
The goal here is to stop your financial situation from spiralling out of control, and to make sure your business can continue trading so you can weather the storm and catch up with your repayments.
It’s only a temporary solution and shouldn’t be a long-term strategy. If your business’s finances don’t improve and get worse, you might find yourself sinking deeper into debt.
Don’t forget to keep an eye on your personal credit score too, and keep it under control. Be aware that late or missed payments can have an impact on your credit score, which may hinder your chances of getting business financing in the future.
Finding out that you’re unable to repay your business loan is a situation no one wants to find themselves in. Defaulting on a debt can have serious implications for your business finances as well as your personal finances (especially if you have a secured loan or you’ve signed a personal guarantee).
If you’re struggling to keep up with the payments, get in touch with the lender ASAP.
It’s also worth having a look at the Money Advice Service’s website. The Money Advice Service was set up by the government to provide free, impartial help.
The small business loans we provide are unsecured, which means we won’t ask you to put your business assets or home up as collateral. And because we base the repayments on your business’s cash flow model, the risk of you not being able to make them is reduced.
* The recommendations in this post should only serve as a guide. If your business is suffering from financial difficulty, you should contact your accountant or solicitor for advice.