The Federal Reserve Banks’ small business survey found that 28% of businesses applied for credit cards in 2021, making it the second most commonly applied for financing after loans or lines of credit.
Credit cards are a tremendous help to businesses, but what about the dark side of the coin? Anyone who’s been in a large amount of credit card debt can attest to the pitfalls of using credit cards. The gold card becomes fool’s gold.
If you’re one of the small business credit card owners who’s ever been way deep in card debt, this article will show you how to wipe the debt for good — and stay out of it.
Tried-and-true Strategies
These seven tried-and-true strategies for getting out from under credit card debt range from settling the debt to renegotiating terms with creditors.
Wondering where to scrape up the cash? Food costs, phone bills, paper and printing — there are always a few ways to get leaner. Trim costs, increase profits, and funnel every extra dollar into your card balances, not into the business.
Have you asked your card company for better terms? Call and explain your situation. Say you’re having trouble making the payments. Many card issuers have hardship programs. This may be your best option.
A good payment history boosts your chances of negotiating. The issuer may drop your interest rate or change your due dates. There’s no guarantee, but it never hurts to ask.
The Consumer Financial Protection Bureau recommends you consult a reputable nonprofit counselor. They may offer free materials, workshops, and debt repayment plans.
If you still can’t get ahead of your debt, reach out to the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America. These are nonprofit organizations with programs that may be able to help you come to terms with your debt.
So are nonprofit credit counseling services the same as settlement companies? The answer is no.
Some debt settlement firms tell clients to stop paying creditors. Missed payments can lead to fees, collection activity, legal action, and a lower credit score. Dealing with the debt this way can also take several months. Some settlement firms are not legitimate. You can negotiate with creditors yourself for free, so try it. Check with your state attorney general’s office or local consumer protection office for complaints about any settlement firm you’re considering. Never pay a debt settlement company in advance for anything.
If you can’t pay, consider settling the debt directly with the card issuer. You could offer to pay part of the amount due. If the issuer agrees to write off the rest, your debt will be gone. It’s better than not paying it. It may hurt your credit history, and it can stay on your credit report for up to seven years. But take note: The amount you don’t pay may be considered taxable income.
Use the avalanche method. That’s paying the minimum on all your cards except the one with the highest interest rate. Put any money you have above the minimums into that card first. Once you get rid of the highest rate, turn your attention to the card with the next highest rate.
Let’s say you carry three business credit cards and the rates are 14.99%, 20.99% and 24.99%. Pay the minimum on all the cards except the 24.99% card. Throw all the extra cash you can muster at that 24.99% card. Once it is paid off, attack the 20.99% card, rolling what you would have paid to the 24.99% card.
That card finally gone? Keep making the minimum payment on the other cards. Repeat until you have crushed every card balance.
Looking for a new card to transfer the balance? That can be a fast way to dump the debt. Take the balance on the credit card that’s charging a high interest rate, and transfer it to a 0% intro rate credit card. Just pay attention to the balance transfer fee, which can be 2% to 3% of the amount transferred or a flat amount, whichever is greater. And know that the interest rate can shoot up after the intro period.
If your business credit card debt is high, it may be time to consolidate. Small business credit card consolidation involves taking out a small business loan to consolidate all of your credit card debt into one payment. You might get a lower rate and stretch out the terms longer.
Whichever route you take, keep in mind that most business credit cards are backed with a personal guarantee, which means that if the business can’t pay the card debt, the owner will be on hook for the card debt.
Still, to collect, lenders generally have to sue and win a judgment, which is expensive for them. So they may be willing to work with you.
If you applied for a business credit card on behalf of your business as an LLC, do you get liability protection? Generally not, if you signed a personal guarantee. A personal guarantee usually makes the owner responsible even with an LLC.
And watch out: Just because you close the business doesn’t mean it’s over. You may remain personally liable for the business credit card debt after the company shuts down.
Big Factors for Small Business Lenders
Credit utilization and debt to income are big factors for small business lenders. The lower they are, the easier it may be to get money in the future.
It might feel like an impossible task, but paying off small business credit cards helps make you more creditworthy. With better credit scores, you’ll get better rates and terms on loans. Financing is crucial to business growth.
Bankruptcy as an Option
If you’ve tried everything and still are in deep, or maybe you’re a few payments behind and see no way out of business credit card debt, bankruptcy may be an option to discuss with a bankruptcy attorney. Bankruptcy damages your credit for 7-10 years, depending on the type you file.
When you have bad credit, it’s harder to lease a car and get the cheapest rates. You’ll pay more for a mortgage, a business loan and car insurance. You might even be asked to put a deposit down to get utilities turned on.
A business has options when considering bankruptcy, including:
- Chapter 11 (or reorganization) lets a business restructure its debts with the bankruptcy court’s approval.
- Chapter 7 (straight liquidation) means the business’s assets are sold off to pay the debts.
Technically, once the case is filed, a stay is automatically applied. This means that any creditor named in the bankruptcy paperwork can’t collect while the case runs. Judgments, foreclosures and repossessions are temporarily put on hold.
Deciding whether to file bankruptcy isn’t easy. Before you decide to seek bankruptcy, you must weigh the pros and cons. Be certain to understand how it affects you and the business, and get professional advice from a bankruptcy attorney.
About Delancey Street
Delancey Street is a business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we help business owners in many states. We tell you how it is; because your business and future is on the line.
