Picture the owner of a small company who has just been served. She owes money to several vendors and utilities and is already behind on payments. Her first thought is the one most owners have: “I’m going to have to pay this creditor in full or go out of business.” She’s backed into a corner and panicking. That doesn’t mean it’s a dead end.
So, if a creditor has sued your business, can you still settle? A lawsuit is simply a formal collection attempt. You still have options. The purpose of a lawsuit is to collect a debt; that’s it. There’s no mystery to it. That said, the existence of a lawsuit does not automatically make settlement impossible. Whether you can get a settlement will mostly depend on the kind of debt. If the lawsuit is for an unsecured business debt, it can probably be settled. If it’s a lease or a merchant cash advance, it’s trickier but not impossible. Taxes are a whole different story.
Types of Business Debt That Can Be Settled
What are the most common types of business debt that can be settled? Credit cards, commercial leases, merchant cash advances, vendor debt and business lines of credit all come up again and again. In short, any of the types of unsecured business debt can likely be settled. Unsecured means there is no collateral securing the debt, such as credit cards and vendor debt.
Some secured debt can be settled, but it depends on who the creditor is and what it’s secured with. A merchant cash advance company often has a blanket lien on all of a company’s assets. While that sounds scary, in practice the company may have limited ability to actually repossess any of that collateral. In many cases, the company would prefer a settlement to repossession. In comparison, a lender that financed a specific machine and has a lien on it typically wants to see that machine returned before it will engage in settlement discussions.
A bank that gave a secured line of credit likely wants you to surrender the business assets before it’s willing to negotiate. It really depends on what value is attached to the assets. Usually, the lower the value, the more amenable a secured lender will be to settling without having to repossess.
You absolutely can settle a commercial lease. But it almost always means vacating the premises first. Then you can negotiate with the landlord for the remainder. However, commercial landlords are very aggressive. That makes the order of operations important: you must make sure that you have an adequate settlement plan in place prior to defaulting on your lease and vacating the premises.
Government debt (e.g. IRS taxes, SBA loans) is very different. It requires a more formal process, such as business bankruptcy or an Offer in Compromise.
Settle for Only 10% or as Much as 90%
The cost is specific to your business. There is more variation in business debt settlement, as compared to consumer credit card debt settlement. Settling a typical consumer credit card tends to run about 50% of the balance. A business creditor might settle for only 10% or as much as 90%. For example, if your balance is $10,000, you could pay up to $9,000 to settle. Creditors who are owed larger amounts of money are often more willing to settle because they know their recovery ability on a large debt could be limited. Then there’s the question of how much can the company pay.
Personal Guarantees
Many owners are most interested in a business debt settlement in order to get off of personal guarantees. Of course, when creditors settle the debts of a company, they usually release the owner’s personal guarantee. So the owner’s personal guarantee and the company’s liabilities are usually settled at the same time. In some cases the creditor will want to know about the owner’s financial situation before they agree to an offer.
Can I keep my business operating after I settle debts? Yes. Although the creditor will likely accept less money if the business is shut down. It’s crucial to compare all the risks and rewards associated with keeping your doors open, versus closing them. But if the owners decide to work with their creditors to settle the business’ liabilities while they can continue to operate, they can leave all that debt behind them (along with their personal liability) and continue to make a living from the business.
So the honest answer to the question is a qualified yes. The key is identifying what kind of debt you’re dealing with, because the approach varies by category. Obviously, secured lenders want to get their collateral back. Landlords want to get you out. The IRS/SBA require a process. You need to take account of everything: the amount of debt, its source, what you can pay, and how you want to use the business. And it helps to have a plan before disaster strikes. Just because a settlement might be on the table doesn’t mean that it’s on the table right now and in the amount you hope for. There are options, but there are also hard realities.
