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

Get Legal Help Today

secured lock Secured with SHA-256 Encryption

Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

Full Bio →

Written by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

UPDATED: Jun 29, 2022

Advertiser Disclosure

It’s all about you. We want to help you make the right legal decisions.

We strive to help you make confident insurance and legal decisions. Finding trusted and reliable insurance quotes and legal advice should be easy. This doesn’t influence our content. Our opinions are our own.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about legal topics and insurance. Our goal is to be an objective, third-party resource for everything legal and insurance related. We update our site regularly, and all content is reviewed by experts.

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.

Get Legal Help Today

Find the right lawyer for your legal issue.

secured lock Secured with SHA-256 Encryption