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When a small business cannot repay its debts

Businesses of all sizes in Pennsylvania struggle with liquidity. This is especially true for companies that sell a product as opposed to a service. Products are assets, but they do not bring in cash until they are sold. If they are sold on credit, then they do not bring in cash until the other company settles their debts. It comes as no surprise then that many companies turn to business loans to make ends meet or cover temporary gaps in the budget.

But, what happens when those gaps become permanent and the company cannot repay its debts in time? NerdWallet differentiates between a missed payment and defaulting on a loan. Defaulting is what happens when a business has failed to pay its debts for a period of time. The time depends on the lender. Common examples include a 90-day span or 150 days. But, what can an entrepreneur do if they suspect they cannot keep up with loan payments?

As is often the case with personal finances, business lenders are sometimes willing to work even with risky borrowers to help them catch up. However, it is best to reach out to the lenders before defaulting on the loan. Lenders may even agree to accept partial loan payments for a few months so the business can get its finances in order. Without proper communication, once in default, an entrepreneur’s personal credit score may take a hit, depending on the loan agreement. The lender may also consider litigation to recover its losses.

Many small business owners worry about business litigation, but Forbes believes getting sued is fairly common. Up to 53% of small businesses face litigation for some reason every year. One way that entrepreneurs may avoid this is to check the agreements with lenders. These documents form a binding contract. Depending on the wording, defaulting may not invalidate the agreement and there may be provisions that could keep both businesses out of a court room.

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