It’s been a rough couple of weeks, the numbers look bad, and the settlement company is the best way to save some money. But maybe the loan ends up working out in the end. Maybe the big invoice actually does get paid. Maybe sales pick up. Or maybe a relative steps up and wants to help out. In any event, the business owner now says, “Wait! I don’t want the debt settled. I want to pay it in full.” It makes sense that this scenario would come up.
A settlement is an agreement between two parties. A debt settlement is when you and the creditor agree on a percentage of the debt or a lump-sum amount that will pay the debt off. In practice, it’s only effective if both parties sign off on it and hold up their end of the bargain. From the moment you sign on the dotted line, you’ll have to live with the repercussions that signing on the dotted line entailed. So the answer depends on where you are. A settlement happens because you are unable to pay what you owe or were previously agreed to. If you can pay what you owe, why not just pay it? If that’s your decision, make sure you do it before signing on the dotted line. If you have already signed, the agreement is what it is, so you need to read it.
When you were late paying your bills, the creditor made a decision. They did so because they know the debt isn’t going to be repaid as it was originally arranged. Most creditors would rather get their money without the hassle than not at all, especially if they can avoid an expensive collection or litigation process, and when a lender realizes that it will probably get nothing, they should be interested in settling for less. Owners usually try to negotiate a payoff somewhere between 40% and 60% of what they owe, though some lenders may refuse to settle for anything less than 80%. That gap is what you give up by paying in full, so ask yourself the hard question. Is the turnaround an insubstantial pocket change or can it fund the hole it’ll take to put things right?
Do the Math
Even after a good month, you still need to compare how much money your business brings in to how much money it needs to spend. It can be difficult to be objective at this point and it doesn’t help to cloud the issue. Look closely at the money that is coming in and going out. Get a realistic look at how much money is coming in and compare that to the actual cost of the loan, and then answer the big question: How much can you afford to pay? What do the spreadsheets tell you? One of the biggest mistakes people make when it comes to debt is that they can’t view things in terms of actual numbers. Always take time to play the numbers. If you know how much money you need to work with, you’ll be able to make an informed decision, and that decision should leave your business with as little long-term damage as possible. Be realistic.
Then make a complete inventory of your accounts. Read through every document the same way you’re reading through your books. A loan from an online lender usually involves putting up real estate or business equipment as collateral. The terms on an SBA loan vary with how much was borrowed and for what purpose, from a 7-year loan for equipment to a 25-year mortgage on commercial property. A line of credit may carry interest you can no longer afford. And if you are close to the end of a loan’s term, the lender might take a smaller lump sum instead of trying to collect on the balance. Read the fine print.
There is a slew of other ways to resolve this matter. If what you need is breathing room, you can negotiate lower payments. Adding a few months or years to the term often results in lower payments. You might also want to consider refinancing. A lower interest rate would decrease each monthly payment. You can also do the math and figure out which is more affordable, paying the lender as planned or paying in full.
Talk to Your Creditors
Whatever you lean toward, talk to your creditors. Don’t go off the grid. Remember, your creditors are just people too. Tell them about your difficulties, have an offer ready, keep the highlights of your loan terms on hand, and show them that you’ve got a plan. Having a professional in your corner usually gets a better outcome than going it alone. If you want to handle the negotiation yourself, we’re not here to convince you otherwise. After all, you’re the business owner, and you have the right to make your own decisions. Just be warned that you are taking on a risk to walk away with a different outcome than you would if you had used a professional to negotiate the settlement for you. Someone with full knowledge of the law on debt settlements and your rights can gain more traction, and not every settlement company is reliable. Delancey Street is not a law firm; when litigation is the right call, we refer owners to an independent attorney.
Whichever way you go, read the settlement agreement terms and make sure you understand them before you sign. Do not pay until the agreement is in writing. This is great advice for a variety of situations, but that is especially true for a business settlement. Get everything you can in writing. Don’t make any promises you won’t be able to fulfill. With a settlement you cannot miss a payment, and every payment has to be on time. If you miss one, the creditor can rescind the agreement. So don’t count on your “system” that works so well for other bills–the rules are different for settlements. This is where changing your mind halfway can hurt you. If you stop making settlement payments while you line up the full balance, you could miss one and give the creditor a reason to rescind. In the usual course of events, people change their minds (I know, I don’t understand it either), and you want to have that written down so that everyone knows exactly what’s going on. So talk to the creditor before you change anything.
Just Pay the Settlement and Be Done with It
If you stay with the settlement, just pay the settlement and be done with it. That means the exact amount outlined in the agreement, whether that’s a different monthly payment or a lower amount in full. Pick a day in the month and automate it, or walk to the bank and never look back. In the end, that will have a lower impact on your credit score, and you will no longer have the worry of paying off the debt.
Do the math, check your agreements, and then do what makes the most sense for you. If you would like a second set of eyes, a first consultation with Delancey Street is free and confidential, and if a cheaper option exists, we’ll say so on the first call.
