Bank loan default is recognized by the Australian Securities & Investments Commission as one of the indicators of insolvency. Debts are not bad per se. As in the case of bank loans they can extend your cash, boost your cash flow, expand your business, and improve your credit score. Having a good relationship with a bank also has its benefits because banks, who probe into your finances regularly, have an intimate knowledge of where your business stands and where it is going in the future. Banks can serve as an invaluable financial advisor, whose recommendations who might need when things get tough for you and your business.
It is, however, a drag to a business when it is no longer able to fulfill the terms of the loan obligation, because this can escalate to additional payment burden in the form of higher interest rates, penalties, and other charges. The bank, at the time of default, can also pursue court proceedings to compel you to pay off your debts, which proceeding can be prejudicial to your business, and can, ultimately, result to your business being insolvent.
There is a difference though between being unable to pay on time, which is technically termed “delinquency,” and being unable to fulfill your loan obligations, which is technically termed “default.” Now, how does a business avoid bank loan default and dodge insolvency?
Steps to avoid bank loan default
Create a business plan. Bank loan defaults are not uncommon, but they can be avoided. One sign of a financially savvy business owner is planning the business prior to securing debt financing. Banks often require a business plan, but even if they don’t require one, it is best to create a viable business plan because this can guide your growth and your future profitability. The business plan will show the bank the seriousness of your intent to grow your business.
Start with a smaller loan. If you are still starting out and is operating a small business, it is also best to start with a smaller loan, an amount that your business can pay off over the term given by the bank. There is also wisdom in starting with a smaller loan especially if you can’t provide a form of security, like a property, to guaranty your payment of the loan. There are banks who provide unsecured personal loans and you can use these for your business, but there will be different terms for repayment fees and costs for these types of loans.
Review the terms of your loan contract. Keep an open relationship with your bank and discuss all your possible options. Also take the time to review with your bank the terms of your loan agreement. The purpose of a loan is to improve your business’s cash flow and it would be a waste if you incur a bank loan default because you were not fully aware of the terms, especially the default triggers and interest rates.
Inform your bank asap. When the inevitable happens, and you unable to pay your debt obligation, triggering a default, waste no time in informing your bank. Acting at the earliest time possible will possibly stop your bank from foreclosing on your property or a more complicated legal proceeding seeking repayment of your debt. This article from RSM provides more details on how a bank investigates businesses with respect to bank loans.
Take the bank’s investigation into your business and take their recommendation seriously. Maintaining good relations with your bank can open your business to further financing and more growth but failing to heed the bank’s advice can get your business a step closer to the doors of insolvency. Here at The Insolvency Service we offer financial assessment at no charge to help you with the type of financing that is best suited for your business and the needs of your business.