What Happens When You Default on a SME Business Loan? - 2022

The article was published on 07 June 2020 and was recently updated on 10 Oct 2022

Cash flow has always been one of the top concerns of Small and Medium-sized Enterprises (SMEs), even before the Covid-19 pandemic. With the onset of Covid-19 and global recession affecting businesses, many Singapore SMEs are faced with worsened cash flow situations. 

Securing an SME business loan is no small feat - it can be a long and tedious process due to stringent credit criteria here in Singapore. Even with the Government’s increased support for financing during this difficult time, as announced during the Budgets this year 2020, banks and financial institutions still have to do their due diligence before approving the loan. 

The surge in business loan applications over the past three months has been overwhelming due to the low effective interest rates of 2.5% and huge quantum of up to $5,000,000 per SME and 5 years loan of the Temporary Bridging Loan (Enterprise Singapore), and we have just started to see more and more business loans being approved and funds finally disbursed after a long wait from the Singapore participating financial institutions.



So now that you already have that business loan approved, what's next? Be sure to learn what it means to default on the loan payments, and what are the consequences it would have on you and your business. 

What can Banks Do When You Default SME Business Loans? 

Missing a payment or payments could result in penalty charges. The terms and conditions of a late payment penalty are stated in the loan contract when you sign on it, and late payment penalty is often one of the charges that SME owners overlook. 

Your loan contract also specifies which conditions or acts constitute a loan default. Different banks and financial institutions define a loan default in different ways, it could be defined as the first payment default or after a series of nonpayment. Regardless of the definition, one thing for sure is that they all charge penalties for nonpayment. 

Once you are in default, your bankwill send you a first notice, which is likely to be a gentle reminder and to urge you to settle the outstanding payments including the late charges. 

When they still do not receive any payment from you, the second and subsequent notices will probably be more firm asking you for payment, as well as to notify you of the consequences of default and possible legal actions that will be taken against you should you still fail to make any payment. 

What Are the Rights of Your Lender in the Event of Default?

If your loan has a collateral, your lender has the right to seize and liquidate that asset that you have mortgaged or assigned as security for the loan. For example, if your loan is secured by a real estate mortgage, your lender may foreclose on this property and sell it to recover the outstanding loan amount. Other assets that can be used as a collateral are machinery and equipment, accounts receivable or even a bank account.

However, if your loan is unsecured, it is usually backed by your personal guarantee. A personal guarantee is a binding statement that allows the lender to file with a court to seize and liquidate personal assets to cover the loan. 

What happens if you default on a personal guarantee on Your SME Working Capital Loan? 

All unsecured SME business loans require a personal guarantee, which means your lender has the right to go after the guarantor directly and lay claim on all personal assets until it is sufficient to pay off the loan.   

Usually key directors or major shareholders are required to furnish personal guarantee with the liability capped at the principal amount of the unsecured business loan. If there are more than one guarantor to the business loan, the joint and several guarantees executed by all the guarantors will all be legally liable for the outstanding business loan in the event of a loan default.

If the guarantor(s) are unable to provide any personal assets that can offset the outstanding loans, the worst case scenario would be to proceed with bankruptcy proceedings against the guarantor(s). 

A Loan Default Affects Your Credit Rating

Defaulting on a loan not just affects your business credit rating, it also has repercussions on your personal credit rating as well. Your personal credit profile, total loans outstanding, ability to pay, and incidences of loan default are all reflected in your Credit Bureau Report, and a credit rating score is assigned for each borrower. This credit rating score will serve as a reference to potential lenders should you apply for a personal or business loan in the future.

No SME owner wants to be caught in a situation of a loan default. However, sometimes unforeseen circumstances, such as the current Covid-19 pandemic, could happen which is not within a business owner’s control, leading to a loan default that is unavoidable. Most lenders will appreciate a forthcoming debtor, and might actually be willing to work something out at reasonable terms. 

So before you think of running away, seek help first and talk to your lenders. Moreover, under the current Covid-19 situation, find out more about the temporary amendments made to the bankruptcy and insolvency laws under the Covid-19 (Temporary Measures) Act - the monetary threshold for bankruptcy has been increased from S$10,000 to S$100,000 for corporates.


An Irregular Payment Affects Your Future Business Loan Borrowing

An irregular payment of your business loan can affect your future bank loan borrowings with the same bank or other banks. A good credit history with a bank is important when you need to borrow money for your business. If you have missed payments or been late on payments with your business loan, this will show up on the internal bank's record. 

This will make it more difficult to borrow money from a bank in the future, because the bank will see that you are not a reliable borrower. You may be able to find a different bank that is willing to lend you money, but the interest rates and terms will likely be much worse than if you had a good credit history with your original bank. It is important to always make your payments on time and maintain a good relationship with your bank if you want to be able to borrow money when you need it.


What Can You Do If You Find Yourself Unable To Service The Business Loan?

Talk to Your Lender 

When you find yourself missing payments, the best thing to do is to contact your lender before they start hounding on your doors. Being upfront and proactive reflect that you are a responsible borrower. Your lender might also reciprocate by providing reasonable options to help you. 

Bear in mind that it is always in the lender's interest for you to make payments - it is a company that needs its investment back and will be willing to acquire it in the best way possible.

Talk to your bank’s loan officer, and he/she will advise you with options to help you “reinstate” the status of your loan account.

Possible scenarios that could happen:

1. The lender will set up a reasonable plan for you to pay back the loan.
2. The lender will seize and liquidate your business or personal assets to cover the loss.
3. The lender will cut its losses and settle with you for a defined amount.

Talk to Credit Counselling Singapore (CCS) - Business Debt

As a business owner, if you are experiencing loan servicing difficulties due to poor cashflow, the Micro and Small Enterprise (MSE) team from CCS can help. The MSE team can work with you to assess your business viability, ascertain your financial situation and explore suitable solutions to improve cashflow. They can also help you address personal liabilities arising from unsecured personal borrowings or credit card debts.

A session with the MSE team may last between one and one-and-a-half hours, but may take longer depending on the complexity of the financial circumstances. In most cases, having one session will be sufficient. However, you may request for subsequent review sessions, if necessary.

Debt Restructuring Programme (DRP) - Standard Chartered Bank

Debt restructuring programmes can be incredibly helpful tools for business owners who need to restructure their business term loans. The Standard Chartered Bank Debt Restructuring Programme (DRP) is one such programme that can provide business owners with the necessary assistance to get their businesses back on track.

The DRP offers a number of benefits to business owners, including: 

- A lower interest rate on outstanding debt

- More manageable monthly repayments

- The ability to reschedule loan payments for up to 5 years
- No Adminstrative Fees for processing the application

Do note that this offering is only for existing Standard Chartered Bank customers with existing business facilities such as
- Business Installment Loan (BIL)
- Business Overdraft Loan (BOD)
- Working Capital Loan (WCL)


By opting for this Debt Restructuring Programme, although it will not affect your personal credit bureau a default record will be placed by Enterprise Singapore which makes it more difficult for you to obtain any government assisted loans in the future.

Conclusion:

The best strategy for maintaining a financially healthy and stable business is to have good cash flow and accounting practices from the start. It is also important to draw a clear line between business and personal finances, because mixing finances can cause SME owners to miss any warning signs that their business finances are not on track, or make it easier to “borrow” money from the business to pay for personal needs.

Remember not to bite off more than you can chew. Do a proper business planning and run through your figures first, and do not take on a bigger loan than you require. Last but not least, prioritize your debt payments. Do what you can to avoid defaulting, but if you must, just keep moving forward and keep improving your financial health!

Above all else, remember that defaulting on a SME working capital loan is serious, but it is not the end of the world.  

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