At first, the interest rate is manageable, the bills can be paid. A few weeks slip by, you dip into the credit line a bit more, but still there’s no sense of panic. Then you begin to see a faster accumulation of interest than you’d have anticipated. Perhaps you start late payments, thinking you’ll get caught up eventually. There’s usually a tipping point where the numbers become more uncomfortable. It could be the inability to make some payments. A drop in sales or an unusual increase in expenses. A slowdown of incoming revenue or cash flow. The interest is piling up, and you begin to find yourself on the losing end of the arithmetic. You can’t pay the loan back, and there is little point in borrowing more.
If that sounds familiar, you are in a lot of company. In a National Debt Relief survey of 438 people carrying business debt, 63% said it had increased their personal stress, 24% said it had damaged their business, and 17% said it had forced them to close. Here’s the thing, though: Business debt is serious debt. If the business fails, paying what it owed is still your responsibility as the owner. The financial strain will follow you even if you close the business.
How the Company You Hire Actually Makes Its Money
At that point a lot of owners start looking at debt relief, and the first sensible question is how the company you hire actually makes its money. For settlement, the answer is simple. When they do manage to settle one of your business loans for less than you actually owe, that is when the debt settlement company gets paid. This ensures that a company has no incentive to deliberately drag out the process of debt settlement, and that it’s motivated to settle the debt and close your case.
Fees can range from 15% to 25% of the enrolled debt, depending on the state you live in. That fee is built into your monthly payment rather than billed separately. Enrolled debt can include unsecured business loans, lines of credit, and personal credit cards you have used for the business. A reputable company will contact your lenders on your behalf. They will negotiate with them to reduce the balance of your loan, and any subsequent interest and fees. Even with the fee folded in, you should still end up paying less than you originally owed. On the downside, the process of going through a debt settlement company can be stressful and emotionally challenging.
Consolidation is paid for differently. A consolidation loan company works by finding you a new loan in which to consolidate all of your debt. You get one loan and one bill instead of all the individual debts. They earn their money in interest on the loan. It doesn’t make the money go away. It just combines multiple loans into a single one. But, if the interest rate is lower, you’ll save money. That is a big if. Some consolidation loans carry up-front costs and other fees, you may end up with a higher rate, and if any of your old loans has a prepayment penalty, that has to be added to what you borrow. Repayment usually runs at least five years, and over that stretch you could pay even more through interest. If your credit is poor, you probably won’t be approved at all. What this means is that if you are considering a consolidation loan, you need to analyze your situation carefully.
Bankruptcy carries no settlement fee, though a reorganization can be costly in its own right. As you might expect, bankruptcy has a very real effect on your credit. Your business credit takes the heaviest hit. The bigger bill does not show up until you apply for a new loan and see how much your interest rate jumps up. Some applications are denied outright, and many owners who come out of bankruptcy find themselves back at square one within a few years.
If you have only fallen behind on an account, there is a smaller step. A hardship payment plan is an agreement between you and your lender. Sometimes you need to ask for it, and that alone can be stressful, but it is worth asking if they can set you up on a payment plan that brings your monthly payment down to an amount you can afford. It is not a loan.
You Can Avoid Unfair Settlement Fees
So what is fair? The good news is that you can avoid unfair settlement fees. By asking the right questions, and looking out for the right kinds of services, you can be assured of what you are buying. No matter how diligent you are, there are two things that can cause the settlement fee to be unfair. First, an excessive charge for services that has nothing to do with your case and second, an agreement that makes you pay the fee regardless of the outcome. Look for the fee to be a set percentage of your enrolled debt. Make sure the fee can only be collected after the debt has been settled. Any settlement company that asks you to pay a fee up-front is suspect. A fee of 15% to 25% of enrolled debt, collected only as debts settle and built into your monthly payments, passes that test. It’s clear, easy to understand, and the parties’ financial interests aren’t skewed. A company that engages in high pressure sales tactics or discourages you from asking questions is trying to take advantage of you. No guarantees. Not all cases are the same. A firm that guarantees a certain type of outcome may be over-promising and under-delivering.
We get it, you’re stressed, and you need a solution. But don’t rush to accept the first offer you get. Regardless of what the salesperson on the other end tells you, just ask them when they get paid. Understand what you are signing up for before you commit. Read it. Read it again. Make sure the amount to be repaid is stated clearly. Once you have the bottom line, you can get comparisons and feel out what’s fair. The ultimate test is savings. When you’re done paying, are you actually saving money?
Settlement also tends to finish sooner than a consolidation loan; some owners have settled their debts in 24 to 48 months. The best way to determine this is to get a consultation with a reputable firm that can give you an idea of how long your repayment plan would take and what you’d have to pay. The timeline will vary depending on the amount of debt that you have and how much you can afford to repay per month.
No One-size-fits-all Solution
Business debt can be painful and frustrating, and it’s easy to make a bad decision when you get stressed out. So which route should you take? That depends entirely on your situation. When it comes to business debt relief there is no one-size-fits-all solution. Each type of debt relief company has its pros and cons, and determining which is right for you depends on your unique financial situation. Be smart, be careful and get the facts about your situation.
