Your loan contract with a bank is not set in stone, unable to be altered. It’s a business contract. And contracts can be changed.
The bank called. Your loan officer said you were unethical because you didn’t make the loan payment this month. The conversation ended with this advice, “If you were honorable, you’d do whatever it takes to pay this loan.”
The loan officer’s suggestion isn’t only exploitive — it’s incorrect.
If you chose to make payroll this month instead of the loan payment, you made a business decision. Ethics had no bearing on your choice. We would argue your decision to make payroll was very ethical because paying your team helps them care for their families.
Why Loan Repayment is a Business Decision
Your loan contract with a bank is not set in stone, unable to be altered. It’s a business contract.
And contracts can be changed.
You and the bank entered into this contract as a business decision.
- The bank reviewed your credit history, financial status and business plan. They interviewed you as the business owner, evaluated the credibility of your plan and the purpose of your loan. With favorable results, the bank agreed to lend you money. Importantly, the bank accepted the risk of joining you on your business journey. That means they recognized the possibility the loan might not be repaid.
- As the business owner, you and your team agreed to do the work necessary to repay the debt. You received an infusion of cash and in return, guaranteed the bank would be repaid the principal amount plus a fee (interest) for the loan.
But if your company has begun experiencing stress and can’t continue to pay its way, you may choose to default on the loan. Not paying the loan becomes a business decision, not an ethical one.
Corporations often default on loans because changing economic conditions affect the business performance and they’re not able to make payments. The result? A few lawyers from the bank and the company gather in a conference room and renegotiate the terms of the agreement. No one suggests the leadership team should cash in his or her 401Ks or sell their homes to make repayment. And no one says they’re unethical for defaulting. Small business owners should be treated with the same professionalism as larger companies.
Are there repercussions for not repaying a loan? Sometimes. Over time, if a company continues to default on loans, its credit rating may go down. That doesn’t mean the company is unethical. It continues to operate in good faith, provide excellent customer service, and be led by smart people. Poor performance may be linked to a business plan that is too aggressive or to changes in the marketplace that are occurring faster than expected.
Bankruptcy’s Purpose and Why Lenders Mention Ethics
Congress enacted bankruptcy laws 40 years ago, intending to offer compassion and a second chance to individuals and companies interested in regaining financial health.
At the time, lenders became worried. Banks rely on loan repayments (plus interest) to stay in business. Lenders believed if companies began declaring bankruptcy, the bank’s financial position would be at risk. In response to this fear, banks began encouraging companies and individuals to view repaying a loan as a moral obligation. Why? Because lenders realized our society values honor – upholding commitments and following through on promises.
But in business, survival is the priority. No business owners wake up and says, “I’m not going to make the loan payment today.” In reality, many business owners who are struggling will stop taking a personal paycheck to make ends meet. Then, they’ll max out their credit cards. When they have no remaining funds, defaulting and potentially declaring bankruptcy are the final options. Bankruptcy becomes a hard business decision, but one that is made by business owners with high integrity.
If you’re struggling to repay a loan, it’s important to remember the following truths:
- Bankruptcy and loan restructures are financial tools to help companies regroup, recover and restart.
- Choosing not to pay a loan is a business decision made by ethical organizations and individuals. This process does not diminish the company or the individual.
Talk with our team of experts at Second Wind Consultants about bankruptcy alternatives. Our strategies will help you survive and succeed.