When You Can't Pay Your Business Loan - 3 Steps To Take Immediately

There will come a time to most businesses where they struggle to make loan payments. It is just the nature of business and a fact of our ever fluctuating economy.

Just think about the business slowdown that happened with the 2008 financial crisis.

If you find yourself or your business in this position - not being able to pay your business loan - here are three steps that you should take immediately:

1) Review Your Loan Document: Your loan documents will state specifically what a lender can do in the event of a default. While you should have read these in detail when signing them, most of us do not. So, read them now!

Your loan documents will outline when you are considered in default, what fees and interest rate increases you may face, what assets (business or personal) that can be taken as well as any other recourse the bank or lender may be able to take against you and your business - including what courts they can use or if it can only go to an arbitrator of their choice.

The idea is to arm yourself with as much knowledge about this process and what a lender can do. Many bankers will try to do underhanded things - mostly because they don't want a loan they underwrote to make them look bad.

2) Call Your Lender: The reasoning here is to make them aware. Thus, it does not come as such a blow to them. A mad banker or lender is very hard to work with.

Also, if you have a guarantee on your loan - like with a SBA loan - call them as well.

The goal here is to try to work out a deal. Your bank would rather work a deal with you then to have to incur the added costs of seeking a judgment against you or taking and selling your collateral (personal or otherwise) - especially if they think that they will not get anything in return for the added costs.

So, try to work out a deal. Try to get your interest rate reduced or your fees waived. Set up a payment schedule or extend the term on the original loan; making the payment more manageable.

3) Create A Payment Plan: Create a payment plan with what money you have left as well as the assets that you can sell right away for immediate cash.

Get a list and amounts of all the cash resources you can muster as well as the 'fire sale' value of all the assets you are willing to sell off immediately (do know that if there is a lien on some of your business assets, you cannot sell them without the lien holders approval - thus see number 2 above regarding working with your lender).

Once in place, prioritize who will get paid - e.g. who should get paid first!

You always want to pay your employees and your tax liabilities first. Not paying these could land you in jail. You definitely want to avoid this.

Also, look at those who have additional claims on your business or assets. Your suppliers who may only have claims on the goods or supplies you purchased from them. They could be moved down the list.

But, your bank or lender could have an additional claim on all your business assets as well as (and here is the kicker) your personal assets. Thus, look to pay them first or near the top. You definitely do not want to lose your personal asset - like your house, car, retirement fund, stocks or other valuable heirlooms or personal possessions.

Lastly, never file for bankruptcy. Only use this option as a last (a very last) resort. The reason is that filing bankruptcy on your business will severely impact your personal future life as well. Thus, a few years down the road when you want to purchase a new house or a new car or even try to get a job or insurance, this will come back and haunt you - much more than just having some late pays or charge offs on your credit report.

The overall goal of these 3 steps is to reduce the damage - both to you and your business. If you can manage this entire process in the right way - making deals and paying those high priority first - you might be able to come out of this mostly unscathed; which can only help you in the long-run.

Thus, if you find yourself unable to pay your business loan, follow these three simple steps and try to minimize the damage as best as your can.

Joseph Lizio holds a MBA in Finance and Entrepreneurship, is the founder of Business Money Today, has a strong commercial lending background and is regarded as an expert in business and finance - specifically business loans and working capital.