Quick answer
If a business loan defaults, the lender sends a written notice, then (after a notice period) can demand the full balance and enforce its security, call on guarantors and report the default. Subscribing banks must give small businesses at least 30 days' notice of a payment failure. Acting before default, with a proposal, gives you far more options than waiting.
Key points
- A missed payment isn't the same as enforcement; there's usually a notice period in between
- Banks that subscribe to the Banking Code must give small businesses at least 30 days' notice of a payment failure
- Security and personal guarantees decide what the lender can reach, not the company alone
- Early contact, with a realistic proposal, is the most effective thing you can do
- Free help exists: the Small Business Debt Helpline, the ASBFEO and AFCA
A default feels like a cliff edge, but it is usually a staircase. There are steps between the first missed repayment and the day a lender enforces, and the steps are where most of your choices sit. People who understand the sequence tend to act sooner and get better outcomes than people who avoid the letters.
This guide describes what typically happens, what the rules say about notice, what the lender can reach, and what you can do at each stage. The details depend on your contract, so treat it as a map and then read your own documents.
What counts as a default?
A default is whatever your loan agreement says it is. The obvious one is missed payments. But agreements commonly list others:
- Payment defaults: a repayment not made on time or in full.
- Covenant breaches: failing a financial ratio or reporting requirement.
- Insolvency events: administration, liquidation or a statutory demand.
- Security problems: the asset losing value, being damaged, uninsured or sold without consent.
- Misrepresentation: information given to the lender turning out to be wrong.
- Cross-default: a default on another loan triggering this one.
Read the default clause and the definitions together. The 2025 Banking Code of Practice also puts limits on banks: a default must be material by its nature or in its effect, and standard small business loans can’t rely on a vague “material adverse change” clause. Non-bank lenders aren’t bound by the Code, so their documents can be broader.
What happens between a missed payment and enforcement?
Most lenders follow a pattern, though speed varies widely.
| Stage | What typically happens |
|---|---|
| Early arrears | Phone call or email; late fees or default interest start to accrue |
| Formal notice | A written notice of the default, naming the amount and a deadline |
| Notice period | Time to pay or remedy; this is when negotiation is most productive |
| Demand | The lender requires the full balance and may withdraw undrawn facilities |
| Enforcement | Security is enforced, guarantors are called on, or legal action begins |
| Recovery | Sale of the asset, shortfall claims and costs |
The Banking Code gives small business borrowers real protection at the notice stage. A subscribing bank must give no less than 30 days’ notice of the payment failure before demanding full repayment or starting enforcement, and no enforcement takes place if the overdue amount is paid in that period. For other types of default that can be fixed, the bank must state the grounds and give at least 30 days to remedy.
There are exceptions. Notice can be shorter or absent where a party is insolvent, or where the bank needs to manage a material and immediate risk. And if the loan isn’t in default but reaches the end of its term, the bank must give at least three months’ notice if it decides not to extend.
Outside the Code, the contract and general law control. Private and short-term lenders often have shorter timelines. That is why it matters who your lender is and what your agreement says.
What can the lender actually take?
That depends on three things: the security, the guarantees and the borrower’s structure.
- Secured assets. A mortgage over property, a security interest over equipment or vehicles, or a general security agreement over business assets lets the lender enforce against those. For property, state law sets the process, which usually means notices, a period to respond and a sale. For other assets, the lender may repossess or appoint a receiver.
- Guarantors. A personal guarantee lets the lender pursue the guarantor for the shortfall. Under the Banking Code, a bank generally must first enforce security provided by the borrower, before calling on a guarantor, and if the action involves a principal residence it is to encourage the guarantor to share their circumstances.
- The company. If the borrower is a company with no guarantee and no security, the lender’s claim is against the company’s assets only.
Our pages on business loans and personal guarantees and the risks of using your home as business security go deeper. The glossary entries for default and default interest cover the terms.
What does default cost, beyond the missed payment?
More than the shortfall. Expect some combination of:
- Default interest and fees on overdue amounts, as the contract provides.
- Enforcement costs: legal fees, valuation costs, agent and auction charges, usually added to the debt.
- A shortfall if a sale realises less than the balance, which the borrower or guarantor still owes.
- Credit reporting: a payment default may be reported to a credit bureau. If a bank does so, the Banking Code says it must tell you.
- Loss of facilities: other lenders may withdraw or reprice, and suppliers may tighten terms.
Fast enforcement and forced sales rarely realise full market value. That is a good reason for everyone, including the lender, to prefer an agreed solution while there is still time.
What if the company can’t pay its debts at all?
Directors have separate duties. A company that cannot pay its debts as they fall due is insolvent, and ASIC explains that directors must prevent the company from trading or incurring debts while insolvent. Civil penalties can be significant, and compensation claims can reach the directors personally.
There are structured options, and ASIC describes them on its insolvency for directors page:
- Safe harbour protection from insolvent trading liability may be available if, after suspecting insolvency, you start developing courses of action reasonably likely to produce a better outcome than immediate administration or liquidation.
- Small business restructuring, where eligible companies can propose a plan to creditors with a restructuring practitioner, and directors stay in control.
- Voluntary administration and liquidation, handled by registered liquidators.
If you’re at this point, take professional advice from an insolvency practitioner or lawyer quickly. For tax-related liabilities specifically, see what a director penalty notice means for you.
What should I do at each stage?
Before you miss a payment. Contact the lender as soon as you see it coming. The Banking Code itself says the sooner you contact the bank, the sooner it can try to help. Ask what assistance is available, and be ready to share figures.
After a missed payment. Pay what you can, say when you can pay the rest and put it in writing. The ASBFEO’s advice to borrowers is to pay what you agree you owe and can afford, and offer a payment plan within your means for the remainder.
After a formal notice. Note the deadline, get your accountant to prepare a short cash flow forecast, and make a written proposal before the period ends. Take legal advice if security or guarantees are involved.
If talks stall. Complaints can go through the lender’s internal process and then AFCA, which handles disputes involving small business credit within its limits. Our guides on how to complain about a lender and AFCA and small business disputes explain the path. The ASBFEO also offers a free dispute service.
For support at any stage. The Small Business Debt Helpline (1800 413 828, sbdh.org.au) is free, confidential and staffed by financial counsellors who can help with debts, personal guarantees, payment arrangements and viability.
What should a proposal to the lender look like?
Keep it short and specific. Lenders respond best to proposals that show they have thought it through:
- What happened, in two or three sentences, without blame.
- Where you are now: current trading, cash position and any recent improvements.
- What you can pay, starting when, as a figure backed by a forecast.
- What you’re offering: extra security, a director contribution, an asset sale, a refinance in a stated time.
- What you’re asking for: a short interest-only period, a temporary reduction, an extension.
Hardship assistance under the Banking Code is decided case by case, and a bank must tell you in writing whether it will help and why. Having your figures ready makes that decision faster.
A worked example
An illustration, not a real client. A building supplies company in Melbourne has a $620k term loan secured by its warehouse, with director guarantees. A large customer enters administration, and the company misses its second consecutive repayment.
The owner calls the bank before the second payment, explains the loss, supplies a revised forecast and proposes three months of interest-only repayments while a refinance with a lender suited to the company’s profile is arranged. The bank issues a formal notice and a 30-day period, accepts the arrangement in writing and records the change.
Contrast the alternative: silence, a notice ignored, the period running out and a lender with no information. Same business, same debt, very different next chapter.
Where does refinancing fit?
Sometimes the exit from a default is a new lender who takes out the old one, particularly when the problem is a one-off event and the underlying business is sound. Timing matters: a new lender will want to see that the arrears are being dealt with, not growing, and may look at an arrangement made with your current lender. Our situation page on business loans with defaults explains what lenders look at.
If you’re behind and want to know whether a refinance is realistic, our enquiry form takes about a minute. Asking involves no credit check, so your file isn’t touched. We don’t broadcast your details to a list of lenders; a real person reads your situation and calls you. Fill it in accurately, including arrears, notices received and the security involved, because a clear picture is what lets us suggest the right option first time.
Frequently asked questions
How many missed payments before a business loan is in default?
It depends on the loan agreement. Some treat a single missed payment as a default event, others allow a grace period. Lenders then usually send a formal notice before acting. Read the default clause and the notice provisions in your contract to see exactly what applies.
Will the bank take my house straight away?
No. Enforcement against a property follows a notice process and state law, and for banks subscribing to the Banking Code, there are minimum notice periods and requirements. The speed varies by lender, and non-bank and private lenders may move faster, so check your documents.
What is default interest?
Extra interest charged on overdue amounts, as set out in your loan agreement. It can also come with default fees and enforcement costs. Ask for a statement of exactly what is owing, and in what categories.
Does default affect my personal credit?
It can if you're a guarantor or the borrower is you personally, as a default may be reported to a credit reporting body. A company default doesn't automatically appear on a director's file unless they've guaranteed the debt or are otherwise liable.
Can I negotiate with a lender after default?
Yes. Lenders often prefer a workable arrangement to enforcement, which is slow and costly. A proposal that is realistic, in writing and supported by figures gives you the best chance. Free advice from a financial counsellor helps with preparing it.
What should I do if I get a default notice?
Read it carefully, note the deadline, don't ignore it, and contact the lender promptly. Get your latest financials together, call the free Small Business Debt Helpline for advice, and speak with a solicitor if security or guarantees are involved.