Start-up companies are susceptible to a whole host of legal mishaps that can damage the progression of the business. Even if the mistake is completely unintentional, serious legal issues are something all business owners want to avoid.
One such common problem can arise when business loans are taken out. They are crucial for many smaller businesses looking to obtain cash flow during the early stages of their existence.
When a loan is taken out, an agreement will be signed by both parties detailing a repayment plan. Even if using a certified loan provider where you’ll have certain legal rights, any late or missed payments can have detrimental consequences.
Personal Liability
Any missed payments outlined in the agreement can incur additional charges, meaning even more debt on what you already owe. Depending on the APR, the debt can soon get out of hand.
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Under some loan conditions, you as the business owner can be personally accountable if financial repayments aren’t met. Not only will the business be forced to close but you could be facing a hefty bill to cover the remaining balance.
You may have used personal possessions and property as leverage to obtain the loan. If payments can’t be met, bailiffs may have the right to seize goods and even your home itself.
Furthermore, your credit rating is likely to be ruined if this situation arises, something that will have a negative effect on any future business projects.
Small Print Issues
Understandably, a significant number of business owners aren’t clued-up with technical financial details. Without professional advice, they could enter into loan agreements with small-print penalties that are very unfavourable. In fact, because commercial finance is unregulated, there is usually a lack of clarity and confusing charges are often issued.
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For example, although APR rates may seem acceptable on the face of things, a late repayment can push the figure up astronomically. You should also watch out for sneaky interest rates and even early repayment charges. There are calls for the Treasury to make business loan regulations much more transparent as part of the 2016 Finance Bill.
When it comes to taking out a business loan, it is advisable to seek professional guidance before agreeing to terms. Loan regulations will differ from lender to lender so it pays to read the terms meticulously. Make sure you agree on an affordable and realistic repayment plan, sticking to payments rigidly to avoid legal issues in the future.
If you found this article interesting, you may also enjoy How Do Small Independent Businesses Become Bulletproof? and our Guide to Setting Up Your Business.
