Should I settle my business debt or try alternatives like restructuring?

Small business owners who are deep in debt often believe they have only two options, close the doors or declare bankruptcy. They don’t. If most of your debts are unsecured or your loan agreement has a reconciliation clause you might be able to negotiate a settlement with your lender that could keep you open for business.

Settlement isn’t for every situation. Some companies handle settlement only, while others do restructuring or refinancing only. But a full option company can handle everything and give you a recommendation.

Settlement companies deal with unsecured debt, things like merchant cash advances, credit revolving facilities, corporate credit cards, etc. They work with the lenders and negotiate the terms of your settlement deal with them. An important thing to note is that when you sign up with a firm you are not getting a deal. The firm must first convince your lenders that your business is in serious trouble if you don’t get help. Settling up takes a long time, and it can be a very stressful process.

Here’s how settlement firms do it, they usually tell the client, stop paying the lenders, and set up an account at a different bank, which is a nightmare for you, but if it works great, you get out of debt for a fraction of the cost.

If it doesn’t work, you can end up deeper in debt than you were when you started. So why would anyone do this? It depends on how broke you are and how much of a hardship it would be if you went under.

Benefits You Can Get from a Settlement Program

• Some debts can be paid off for a fraction of the balance.

If you are in “all hands on deck” mode you might get away with paying as little as a quarter of the balance on your debts, and it has been known to get cheaper than that too.

How much you save is dependent on the severity of your financial hardship.

• Lower payments and less time in debt.

One of the biggest advantages is the faster the debts are paid off the sooner you will free up cash to run your company.

• Avoiding bankruptcy

First, nobody wants to file for bankruptcy and neither should you if you don’t have to. Second, if the settlements are effective you will be able to avoid a liquidation through Chapter 7 or a reorganization through Chapter 11.

• A new start without the burden of debt on your shoulders.

There are many benefits of a debt settlement program the biggest one is it gives you a chance to run your business the way it was meant to be ran, without the shadow of high-interest debt hanging over your head. Now you can focus on your business, get cheaper financing when you’re back on your feet and grow your business!

• The damage to your credit can be minimal to none

Merchant Cash Advances (MCAs) are often the hidden arrow in a settlement company’s quiver. They aren’t loans, so settling them won’t affect your credit. Nor do MCA companies report to the credit bureaus in most cases.

The Not so Good of a Business Debt Settlement Program

• Settlement isn’t for every business.

Only if you’re in really deep financial hardship should you consider debt settlement.

• You could very well wind up paying more taxes.

If you manage to settle a 100,000 debt for 50,000, then 50,000 may be considered taxable. The lender writes it off and reports the amount to the IRS. For more details on figuring out how much you might owe to the IRS after debt settlement head to the IRS website and read Topic No. 431.

• Negotiating with your lenders also means that you’ll be obligated to pay your debt company even if they can’t deliver.

Settlement companies can charge a percentage of the money you owe, in some states the rates are capped. On MCA debt, some firms can charge as high as 25% or more and give you no guarantee of a settlement.

• The program can take years to complete.

Your payments sit in an escrow account until they are paid. And while you’re waiting you’ll find yourself deeper and deeper in default, a risk the company will leverage when negotiating your deal. It can be stressful too. Lenders also can take you to court.

A lender can file a UCC-1 lien and seize whatever equipment, machinery, etc, you need to operate the business. But they won’t always do it if equipment is cheaper than the loan.

If you signed a C.O.J, or Confession of Judgement, the lender might be able to get a judgment against you. You might need a lawyer.

• The arrangement may make your debts bigger.

The company might not be able to deliver. You will find yourself months behind on the payments. The longer you’re in default the more in debt you’ll be from interest and late fees.

Here are a few scenarios in which settlement is the right call.

• You’re already months behind on the payments and the hardship in your business is really bad.
• You can’t afford anymore. Default is inevitable.

The Best Alternative to Settlement

The best alternative to settlement is a good old-fashioned debt restructuring. It’s safe and more structured than a settlement program.

Unlike the uneasy overtures of a settlement, a restructure has precise terms, which are negotiated beforehand. The lenders keep getting paid the entire time and are only being asked to switch the term, not accept a lower amount.

It can also be a less stressful alternative to settlement. You will never sit in default and lenders will often stretch the term of repayment two or three times, which will lower the payment. You might even be offered weekly payments as opposed to the typically daily arrangement.

One of the reasons that restructuring is a better idea than a settlement program, is qualifying for a restructure is simpler than for settlement. You don’t need as much proof of hardship to get help with a restructure.