What happens to a business loan if the business fails?

When a business fails, the loan does not disappear. What matters is who owes it, what secures it, and whether you signed a personal guarantee. This page covers the federal rules on secured creditors and how a guarantee changes your position. Provincial rules and your loan documents add detail.

Secured and unsecured lenders

The Office of the Superintendent of Bankruptcy explains that a secured creditor is one who takes collateral for the extension of credit, and an unsecured creditor is one who gives credit but does not have any security for the debt owed. A secured lender can look to the collateral. An unsecured lender has no claim on specific assets.

Receivers and the ten-day notice

Under the Bankruptcy and Insolvency Act, on application by a secured creditor, a court may appoint a receiver if it considers it just or convenient. A secured creditor who intends to enforce security on all or substantially all of the inventory, accounts receivable or other property of an insolvent person used in a business must send a notice of that intention. It then cannot enforce until ten days after sending the notice, unless the insolvent person consents to earlier enforcement. Sections 243 and 244 have conditions and exceptions, so read them.

Personal guarantees

BDC says that without tangible collateral, you will generally be required to sign a personal guarantee to obtain a working capital loan. If you signed one, read its terms: they set what the lender can claim from you. In the federal Canada Small Business Financing Program, a lender can take unsecured personal guarantees up to the original amount of the loan disbursed, personal assets cannot be used to secure the loan, and the guarantee document may provide for the costs of legal proceedings against the guarantor.

What to do next

Pull out the loan agreement, any security agreement, and any guarantee. If payments are at risk, talk to a licensed insolvency trustee and a lawyer before missing them. Compare this with what to weigh before taking a loan to buy a business.