If you're defaulting on your business loan, chances are it's only a small part of bigger financial problems. Don't stick your head in the sand and wait for more bad news. Develop a game plan to deal with the situation immediately.
Your options include:
- Reorganizing, consolidating or even eliminating debts through proceedings that may include bankruptcy
- Trying to work out a compromise with your lender
- Selling the business or at least selling off certain assets
- Letting employees go and taking other measures to cut overhead to redirect cash flow toward paying your debts
Talk to a bankruptcy lawyer or someone who professionally counsels businesses with credit problems. You shouldn't have any trouble in setting up a free consultation.
A lawyer can explain available options to you at your first meeting. The lawyer should also explain how he or she would expect to be paid. Lawyers who specialize in these matters have ways to work out payment arrangements that their clients can afford.
Negotiating With Your Lender
Talk to your lender about a compromise, such as:
- Different payment terms (lower payments over a longer period of time)
- Forgiving some late payments now in exchange for a longer period of payment
- Lower payments in exchange for a higher interest rate over a longer payment period
- Refinancing at a lower interest rate (to make payments lower)
Lenders aren't always willing to compromise. The best chance you may have to strike a compromise is to have a lawyer representing you in the negotiations.
Assignments for the Benefit of Creditors
If you can't reach a compromise, consider offering to voluntarily give the property back to the lender. Sometimes this can be done without having to file bankruptcy by signing a document called an "assignment for the benefit of creditors."
This generally involves making an agreement with your creditors to allow you to assign business assets to an agreed-upon third party, who'll be responsible for liquidating the assets and dividing them up between the creditors.
"Deeds In Lieu"
If real property is involved, you may be able to accomplish something similar with a "deed in lieu of foreclosure" (sometimes called a "deed in lieu of forfeiture"). You deed whatever interest you may have in the property over to the lender who already has a mortgage or deed of trust on the property.
But be aware that a lender may be hesitant to accept a "deed in lieu" if state law allows a borrower to redeem (take back property after repaying the outstanding loan) for a certain period of time after the deed is transferred (sometimes up to a year later).
A lender may be able to skip the foreclosure process completely if someone has personally guaranteed your business loan. It's much easier for a lender to make a demand on a guarantor with personal assets on the line than it is to foreclose on business property that may or may not be worth enough to cover the debt.