If you fail to comply with the terms of a loan by not meeting
interest or capital payments by their due dates, then you could find yourself
in default. The telltale signs that should alert you to the possibility that
you are heading for default include:
Not paying your bills on time, or juggling bill-paying each
month
Not knowing how much you owe
Never having a positive balance on your overdraft
account.
The consequences
There are serious
consequences if you default on a loan and aggressive steps may be taken to
collect this debt as soon as possible. These include:
A damaged credit rating could prevent you obtaining credit to
take out a home mortgage, purchase a car, or obtain business finance
The entire amount of your loan may become immediately due and
payable, and so make a bad situation worse, perhaps even fatal for your
business
Any assets the business may have could be seized
If you are trading under limited liability, depending on how
the default came about, you could become personally liable to repay the
loan
In the final resort, the business could be wound up and you
could be made personally bankrupt.
Working with your creditor
Putting off contact
with your lender until the business is no longer economically salvageable
implies that you did not adequately anticipate or prepare for your current
financial difficulties. By contacting your lender early, you show you are aware
of the financial troubles and have devised a programme that will improve the
financial picture and keep the loan performing.
Lenders are likely to go along with a workout plan based on factors
other than financial data. They look at the borrower's management team's
honesty, integrity, and long-term business planning ability, track record and
competency. All play a key role in a lender's decision-making process.
Two further points to keep in mind if you look as if you are heading
towards default:
Contact your main creditors if you are facing temporary
problems in making payments. They may be willing to work out a modified payment
plan that reduces payments to a more manageable level
If you are thinking about turning to a company that offers
debt consolidation loans, debt counselling, or debt reorganization, investigate
the company thoroughly before signing any agreement.
