Business Loan Arrears: What Happens When You Miss Business Loan Payments

What happens after a missed payment

The exact sequence depends on the lender and the agreement, but most follow a similar path.

1. Fees and interest. A late-payment fee is usually charged within days, and interest continues on the full balance. Some agreements move to a higher default rate once a payment is missed.
2. Reminders and contact. Letters, emails and calls follow in the first few weeks. Ignoring them is the single most damaging thing a borrower can do at this stage.
3. Default notice. Where the agreement is regulated by the Consumer Credit Act, the lender must serve a default notice giving at least 14 days to put things right before it can end the agreement or demand the full balance. Unregulated agreements, which include most limited-company loans, will have their own default clauses, often triggered by a single missed payment.
4. Formal demand. The lender terminates the agreement and demands the whole outstanding balance, not just the missed instalments.
5. Call on the personal guarantee. If a director or owner has given a personal guarantee, the lender can now demand payment from them personally, usually by letter with a short deadline.
6. Enforcement. Options include county court proceedings leading to a judgment, a statutory demand followed by a winding-up or bankruptcy petition, and, for secured loans, appointing a receiver or taking possession of the asset. Where a lender holds a debenture over a company, it may be able to appoint an administrator.

Consumer Credit Act protections

Loans of £25,000 or less to sole traders, partnerships of two or three people and other unincorporated businesses are regulated consumer credit. For these agreements the lender must follow Financial Conduct Authority rules on treating customers in financial difficulty, must serve a proper default notice before enforcing, and must give information about free debt advice. Limited companies and LLPs generally fall outside this regime, and so do larger loans. That does not mean a company lender can do anything it likes, but the statutory protections are thinner, and the agreement itself sets most of the rules.

Contact the lender early

Lenders have far more flexibility before a default is registered than after. A call the week before a payment is due, explaining the shortfall and proposing a plan, is treated very differently from silence followed by a bounced direct debit. Have a 13-week cash-flow forecast ready, be honest about the cause, and make a specific proposal. Keep a note of every conversation and confirm agreements in writing.

Forbearance options to ask for

• A revised payment schedule that catches up the arrears over several months on top of the normal instalment.
• A short payment holiday where the difficulty is temporary. Interest usually continues and is added to the balance.
• A term extension that lowers the monthly payment. A longer term increases the total repaid. See high loan repayments.
• Interest-only payments for a defined period, after which capital repayments resume.
• Freezing fees or default interest while an arrangement is in place.

None of these is guaranteed, and a lender may refuse. But a lender that refuses a reasonable, evidenced proposal is also more exposed if the matter later reaches a court or the Financial Ombudsman Service, which covers regulated agreements and some small-business complaints.

The impact on credit files

A missed payment is reported to the credit reference agencies and stays on the business's file. A default is more serious and typically remains visible for six years. For a limited company, the company's own file is affected; where a personal guarantee has been called, or the borrower is a sole trader, the individual's personal credit file is affected too. Arrears make new business finance harder to obtain and more expensive, and can affect supplier credit limits and trade insurance. Our guide on refinancing with bad credit explains what remains possible later.

What lenders can and cannot do

Lenders can charge the fees and interest set out in the agreement, report arrears, instruct debt collectors, take court action, enforce security, and pursue guarantors. For regulated agreements they must act in line with FCA rules; for all agreements they must follow the contract and the law.

They cannot take goods without a court order or a right under the security documents, cannot claim powers they do not have, cannot harass or mislead, and cannot pursue a guarantor for more than the guarantee covers. If you are unsure whether a demand is valid, get it checked before paying or signing anything.

Why new borrowing is rarely the answer

A business in arrears has, by definition, failed to afford its existing commitments. Another loan adds a repayment to that list, usually at a higher cost because of the credit history, and often with a new personal guarantee. The exception is where a genuine, affordable consolidation or refinancing replaces facilities the business cannot service with one it can, and even then it is only sensible once the underlying trading is sound. Be especially wary of any offer that arrives unprompted once arrears are reported; the speed of approval is not a sign that the facility is suitable.

Formal options if the business cannot recover

If the forecast shows the business cannot meet its debts on any realistic terms, there are formal routes. Each one requires a licensed insolvency practitioner; Finance Business Debt cannot arrange or advise on them.

• Company Voluntary Arrangement (CVA). A legally binding agreement between a company and its creditors to repay some or all of what is owed over a period, typically three to five years, while the directors keep control and trading continues.
• Administration. An insolvency practitioner takes control of a company to rescue it, achieve a better result for creditors than liquidation, or realise assets for secured creditors. It gives a moratorium against enforcement.
• Liquidation. The company's assets are sold, creditors are paid in the statutory order, and the company is closed.
• Individual Voluntary Arrangement (IVA). For sole traders and partners, who are personally liable: a binding agreement with creditors to repay an affordable amount over a fixed period, which can allow the business to keep trading.

The Insolvency Service publishes official information on each procedure. Our guide to what happens when a business cannot repay its loans walks through the sequence in more detail.

Frequently asked questions