No one likes being in debt. Unfortunately, it’s part of our culture, and sometimes you don’t have an option.
If you’ve just started up a business that you’re financing with a loan, the last thing you want is for the property to be repossessed because you can’t make a payment. Here are a few things to keep in mind if you’re worried about your brand new company staying in business.
What Can Be Repossessed?
If you can’t make a payment, don’t worry—the bailiffs or collection agents can’t just waltz into your business and take anything that will pay your debt. When you applied for a loan, you signed paperwork that protected you against unwarranted repossessions: your security agreement.
The security agreement outlines what you are willing to pledge as collateral (security) for your loan. It outlines both your and your lender’s rights concerning what can and can’t be repossessed. If there is something specific you don’t want to put in danger of being repossessed, make sure you outline that clearly. (For more information about security agreements, check out this article from Poznak Law Firm.)
Essentially anything can be used for collateral if you don’t specify otherwise, including either material possessions (cars, property, homes, appliances, equipment) or immaterial assets (royalties or goodwill).
As soon as you know you’re not going to be able to make a payment on your business property, call your creditor. Communication can mean the difference between losing your collateral and keeping your business open for just enough time for you to make ends meet. Creditors will be much more willing to extend a due date if you’re up front and honest with them.
If your lender is willing to extend a payment deadline, get that agreement in writing. A written contract will always take precedence over verbal agreements; your creditor could still repossess your collateral if the agreement isn’t written.
Any security agreement you sign will favor your creditor. This is only fair, seeing as the creditor is placing their trust in you to have a successful business, allowing you to pay them on time and in full. The security agreement is largely for their sake.
This means that you should make sure you take every available precaution in the contract. In the event of repossession, that contract will virtually be your only protection against losing your equipment, property, or whatever else you offered as collateral.
Here are a few security options you can look into to protect yourself:
- Some security agreements can stipulate that the lender hold the collateral until repayment (instead of selling it immediately).
- If you think that some equipment or other assets will bring more if sold as a set rather than as individual piece, require that the most profitable sale be made in the event of repossession (a percentage of the money made from sold collateral will go towards your debt, so it’s in your best interest to see that it’s sold for as much as possible).
- Creditors are not allowed to damage or break into any property to collect collateral. If they reclaim it in a way that damages your personal property, they have violated their prerogative. Of course, simply locking your door and turning them away will do no good—that’s what warrants, bailiffs, and collection agents are for (for more information, visit Envoy Court Bailiff).
- If your contract is not legal according to the state, it may be deemed void by a court of law. This could either work for or against you, so it’s best to make sure that the contract is completely valid before signing.
If all else fails and your property is repossessed, make sure you know what your rights are. Sometimes lenders aren’t authorized to simply enter your business residence and take the collateral (although most security agreements do allow for that). If you want to have the protection of knowing your lender needs a warrant to seize the collateral, make sure you indicated that in the security agreement.
Of course, the best way to ensure that your business property or equipment isn’t repossessed is to ensure that you can always pay your creditors on time. Don’t over-extend yourself, and don’t take unnecessary risks. That’s easy enough to say, but sometimes there’s nothing you can do. If you do end up facing repossession, just make sure you understand your rights and the rights of your creditor. Being prepared and informed is the best protection against repossession.
Melanie Hargrave is a wife and homemaker whose family is her pride and joy. She has always been interested in small business and investments, and enjoys writing about what she learns. In addition to spending time with her husband and daughters, she loves being outdoors, playing sports, and sharing her experiences with others.