It doesn’t matter what industry your business operates in; you’re going to have to spend money to make money. The tricky aspect of running your business is often to break even or better yet, make a profit and maximize your return on investment. With that in mind, small business loans were created by creditors to help businesses free up their cash flow with working capital to keep the lights on or scale their business.

Unfortunately, not all companies generate a profit after taking a small business loan, leading to the creditor issuing a charge-off.

What Is a Charge Off?

A charge-off is issued to debtors when they’re late on paying debt such as credit cards or loan repayments. The lender presumes that the debt will remain unpaid, and as a result, they remove the income from their ledger. The debt is documented in the lender’s organization as “bad debt” or “charged-off”.

So what does “charged-off as bad debt” mean for your credit score?

The charge-off is usually applied to your account after 6 months of failing to repay the borrowed amount, and is sometimes referred to as “written-off” instead of “charged-off.”

Lenders often use the two terms interchangeably, but regardless of the term, it’s bad news to be issued a charge-off by a lender as it signifies the account is inactive due to non-payment.

Charge-off Debt vs. Transferred Debt  

Transferred debt is when a lender chooses to sell that debt to a collection’s agency. The debt is essentially “transferred” over, and the transfer will be noted on your credit report from the original lender. The agency that purchases your debt will then be marked as the active entry for the outstanding balance.

It’s important to note that “transferred” doesn’t always imply that an account was left unpaid and sold to a debt-collection agency. If your account was closed by yourself or sold while still in good standing, then your credit report may still show “transferred.”

How Do Loan Charge-Offs Affect My Credit Score?

After being issued with a charge-off for your unpaid account balance, you’ll receive negative reports for each of the delinquent accounts, causing your credit score to take a hit. The extent to which your credit score will take a hit will depend on which credit bureau updates your report and how high your score is at the time that the charge-off is issued.

As a small business, it’s always beneficial to have the option of additional credit. The most detrimental impact of a charge-off will be the effect it has on your ability to secure future financing in the form of a small business loan or business credit card.

Lenders use your credit score to evaluate your ability to repay the money based on numerous factors, including your payment history, the number of lenders you have credit with and the amounts borrowed. To lenders, long credit history and a high credit score indicate that you’re able to stick to the terms of your agreement and repay any money you borrow.

A lower credit score is often viewed by lenders as high risk, making it more difficult for you to attain credit. The repercussions of a poor credit score mean your loan application may be denied or you may be offered lower amounts or a higher interest rate.

A charge-off can cause serious harm to your credit score and will remain on your credit report for 7 years from the date it was issued. Paying off the entire balance of your debt won’t remove the charge-off. However, it will reflect positively for you when applying for credit further down the line with future lenders.

How to Avoid a Charge-Off

Unfortunately, for small businesses, things can go wrong and debts can remain unpaid. But, there are a few things that you can do to avoid getting a charge-off on your credit report. Furthermore, if you’ve already got a charge-off on your report, there are actions you can take to lessen their impact.

Pay Down Your Debts as Soon as Possible

Chipping away at your debts on time and every time is an efficient way to improve your credit score and maintain its health in the long-term. It’s good practice to set up automatic payments to your lenders to avoid missing a remittance on any credit that you’ve borrowed.

If you’ve already been issued a charge-off, consistently paying down the debt every month will help you clear your debt obligation. 

Communicate with the Lender

When falling behind on payments, it can be an embarrassing and shameful time. Lenders are often more understanding than you think and are willing to work with you to clear your debt.

It’s beneficial for the lender to get you back on your feet, as opposed to completely writing off your debt. Contacting them directly to discuss your options could result in negotiating a lower minimum payment or extending the life of your loan.


It can be overwhelming to keep track of all of your loans and credit cards while trying to manage their balances and repayments. Consolidating your loans into a new loan with lower interest rates and better terms can help get you out of a pinch.

Consider closing down credit card accounts or transferring the balance onto another card with lower interest rates. This solution may not be ideal. However, it will be better than having a charge-off marked on your credit report.

Control Yourself

Limiting credit utilization can benefit your business and your personal finances. After all, if you overextend yourself, you might find yourself straddled with debt you can’t afford.

So before you max out the credit that’s available to you, ask yourself if you have the cash reserves or a future guarantee of income that will meet your debt obligations.

Revise Your Budget

Reviewing your budget and looking for expenses that you can cut back on is a beneficial business practice—whether you need to cut back on travel expenses, utility costs or finding a supplier that can provide products at a cheaper rate. Getting a clear picture of your spending, and evaluating how you can improve it, can help you avoid debt and a charge-off. 

What Does a Charged-off Account Mean for Your Business?

Charge-offs should be avoided at all costs because of their negative impact on your credit score and your ability to borrow in the future. Charge-offs will last 7 years on your credit report, after the date they were issued. That’s a long time to leave a black spot on something so valuable to your business.

If you have been issued with a charge-off, it’s best not to worry and focus on how you can improve your financial situation for the future. Communicate with your lender and use the tips provided above to get yourself back on track.

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