Do You Have To Pay Back a Business Loan if the Business Fails? (2024)

FAQs

Do You Have To Pay Back a Business Loan if the Business Fails? ›

If your loan is backed by collateral, like your business equipment, the lender may take that equipment to recoup some of the money you owe. If your business has failed, you may be able to cover the amount of money you owe by selling off your assets, since you no longer need them to run your business.

If your business fails, you're still responsible for repaying your loan. As in the case of default, if you can't repay, your lender may seize your collateral and/or personal assets to recover its losses.

First, the lender will attempt to collect the debt. If it's unsuccessful, the lender may seize your collateral to recover its losses. The Small Business Administration may step in and repay the lender—the SBA guarantees a portion of the loan—and then seek repayment from you.

The Small Business Administration (SBA) offers several types of business loans. SBA loans need to be repaid. The good news is they usually come with long repayment terms between 10 and 25 years. Also, if you fail to repay an SBA loan, the lender may recover 50 to 85 percent of the outstanding balance from the SBA.

If you fail to pay a business loan, a lender will typically try to work with you, setting up a plan to pay off the loan. If this doesn't work, you'll go into default. If you signed a personal guarantee or provide collateral, your lender has the right to seize assets. Your credit score will also drop.

Only businesses that actually default on their SBA loan can apply for loan forgiveness. Be aware that you may default on a loan without being behind on payments. This happens when you violate the terms of the loan like: Taking on additional debt.

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.

Applicants for the COVID-19 Economic Injury Disaster Loan (EIDL) may have been eligible to receive up to $15,000 in funding from SBA that did not need to be repaid. These "advances" are similar to a grant, but without the typical requirements that come with a U.S. government grant.

Lender seizes your collateral

Next, the lender will seize any collateral — e.g., real estate, inventory, equipment — that you used to secure your SBA loan and sell it to recover its losses. If necessary, the lender can also claim and sell your personal assets, according to the terms of your SBA loan personal guarantee.

SBA loans typically require that all business owners provide a personal guarantee for the loan. A personal guarantee is an agreement that the business owner will personally pay back the loan if the business fails to. Personal guarantees may be limited or unlimited.

What happens if my business fails? ›

These include: Business downsizing — Your business may have to downsize, close down, or sell off assets to meet remaining debt obligations. Forfeiting personal assets — In some situations, you could also lose personal assets to satisfy business creditors.

Yes, for the most part, you can write off your business loan interest payments as a business expense. There are some qualifications your loan must meet, however, according to the IRS: You must be legally liable for the loan. You and the lender must agree that you intend to pay off the debt.

A business loan can affect personal credit. If you personally guarantee a business loan, your credit will be affected. If you're a sole trader or run a partnership, your finances will also be affected by a business loan. In such instances, your credit scores will reduce if your business delays payments or defaults.

All corporations are required to file a corporate tax return, even if they do not have any income. If an LLC has elected to be treated as a corporation for tax purposes, it must file a federal income tax return even if the LLC did not engage in any business during the year.

After the bankruptcy, the LLC's remaining debts are wiped out and the LLC is no longer in business. The LLCs owners are generally not responsible for the LLCs debts. Sometimes, however, an LLC owner signed a personal guarantee that makes the owner personally responsible for a business debt.

So, no, your loans aren't forgiven if your lender goes bankrupt. You're still responsible for making payments, the only difference is that you'll be sending payments to another institution instead of the one that originally gave you the loan.

In that instance, whatever cash is in the business following the sale of assets and the payment of any liabilities the business may have, proceeds will be divided amongst the shareholders on a pro-rata basis. In most instances when a business fails, investors lose all of their money.

Primarily, the obligation to repay the loan does not disappear with the closure of the business. The borrower remains responsible for repaying the full amount of the loan according to the terms agreed upon. If unable to repay, the SBA may seek to collect from any collateral pledged for the loan.

Whatever the amount or type of debt, it's not going away. You'll need to negotiate a debt settlement with each creditor to have your debt paid or forgiven. You can negotiate your own debt settlement or hire a business lawyer, specifically one with experience in debt settlement or bankruptcy.