Businesses can carry too much debt, just as people can. The right amount of debt at the right time can be the difference between struggling and succeeding. According to the Small Business Administration, about 50 percent of small businesses go bust within five years, largely due to insufficient capital, poor credit arrangements and too much debt.
Borrowing money may make sense for bolstering cash flow or financing growth, but the Great Recession taught small business owners how dangerous it is to take on more debt than they can reasonably handle. When the creditors start calling, it’s too late for a retroactive analysis. There are two ways to deal with a cash crunch at that point. First, save the business while settling the accounts. Second, let it fail, but plan an exit strategy that minimizes the financial fallout.
Perhaps some owners might have avoided large debt obligations if they had made smarter borrowing choices earlier in their business lifecycle. But in this guide, I’ll show you both options for saving the business or closing it down, and how settling debts for less than you owe fits into each situation.
Rescue Mode
One of the first steps you can take to save your business is to put your own money in it. As a calculated risk, it probably has failed just as often as it has succeeded. It’s something to consider, however, if your plan is to do it only for the short term to achieve a long-term payoff.
The next step in rescue mode is cutting costs. If you cannot invest money from your own pocket, this may mean subleasing unused office space or selling off underutilized equipment. The hardest thing to do is shrink your workforce, but it is sometimes the necessary step to preserve the business.
The other side of the coin is to build your business and maintain a strong relationship with your customers. Where can you promote your business or even revise the business model so that you can make some money? Can you offer your best customers a discount if they agree to pay faster? Call your suppliers to see if they can provide a discount or extend terms.
Next, contact every one of your creditors and tell them your situation. Don’t ignore them, it only makes things worse. It is always better to address debt problems early on. It’s in everyone’s interest to find a solution. Ask them to reduce interest rates, increase your credit line or restructure repayment.
Sometimes it’s just too overwhelming to handle multiple creditors and collection agencies all at the same time. If the extra stress of fighting off creditors is taking you away from running your business, consider outsourcing to a professional debt-relief company. A reputable company works with your creditors for you to settle your debts for less than you actually owe.
How is it that your creditors will accept less than they are owed? It’s because if your business collapses or you go bankrupt, they may get even less. Also, pursuing the full amount of money can be expensive for your creditors if they must sue to collect it. So settling with you can make a lot of sense to them. Finding a solution is usually in everyone’s best interest. Using a business debt settlement company means you can focus on the business while our team fights to get your balance reduced.
One method of helping the business pay off debt is to consolidate the business loans into a single debt payment. This process can reduce monthly payments without affecting your credit report. By negotiating a loan with a single creditor, you might secure a lower interest rate. A debt consolidation company can negotiate the terms of your new loan, collect your monthly payment and pay off your other creditors. This loan might be unsecured, or it could be secured with the assets of the business.
In the final resort, in order to salvage the company, a business can take advantage of a Chapter 11 bankruptcy. This solution is appropriate in cases where the company’s financial distress is temporary and the company is still viable. It is also expensive and complex, and it should be handled by an experienced bankruptcy attorney. If your assets are worth less than what you owe, filing for bankruptcy may allow you to pay only what your assets are worth, rather than the full amount owed.
An Orderly Shutdown of Your Business
If the business is hanging on life support with debts you can’t manage, you should think about an orderly shutdown of your business. The alternative is simply locking the doors and walking away, which is a risk because creditors can come after you and your personal assets.
The first option is to try to sell the business in order to pay off lenders. A single buyer will make it easier than selling each asset off piece by piece. If you can sell the business, the good news is that you may be able to walk away once you have satisfied your debt obligations. Of course, if the business has more liabilities than assets you may have a hard time finding a buyer.
If no buyer turns up, your next option is to liquidate and try to work out an agreement with the lenders regarding how your assets will be distributed. In most cases, they will accept a settlement for less than the full amount you owe because they know that litigating would be too costly and forcing you into bankruptcy would mean they might receive even less.
Remember, many lenders require you to take personal responsibility for loans or credit lines. If you personally guaranteed a business debt you are still liable for it unless the creditor releases you. When negotiating a settlement on a debt that you personally guaranteed, be sure that the creditor actually releases you from that obligation. If not, you’ll remain responsible for it even after the business is closed.
There is a very last resort, and that is Chapter 7 business bankruptcy. The business is turned over to a bankruptcy trustee who sells its assets, goes after outstanding accounts receivable, pays taxes owed, and distributes any remaining funds to creditors. In Chapter 7 personal bankruptcy, you wipe out any personally guaranteed business debts, too. It’s a clean break, but your personal credit takes a hit for seven years.
No matter which path you choose, make the decision early. The longer you ignore creditors, the worse the situation will be. After all, it’s probably in a lender’s best interest to accept a smaller payoff than invest in litigation or accept less money in a bankruptcy. If creditor calls are eating up your time, hire a reputable debt-relief firm to negotiate for you.
