Business debt settlement can provide real, tangible relief for small and medium sized companies that are in real financial hardship.
Carrying some debt is normal for any business, even the most successful and most profitable ones. Borrowing is how you buy the van, order next month’s inventory, or fix the roof. But vendors, business credit cards, bank loans, IRS payroll debt, landlords, leases, and merchant cash advances can load down a company like any household.
It’s not always just mismanagement that sinks a company. Good products make a good company for a long time, but at some point markets shift, a big new competitor opens across the street, or just the industry as a whole moves on. What’s viable and profitable this year can become completely obsolete overnight. A formerly successful company goes underwater, and the owner juggles as many monthly payments as possible while desperately trying to bring in new revenue. Settling can be a viable fix.
Business Debt Settlement Means
Business debt settlement means negotiating a loan or a contract to be paid off for less than the full balance. You work with the creditor, or the collection agency, to accept a reduced payoff amount - typically a lump sum, but sometimes paid over time depending on who you’re dealing with - and as long as it’s accepted in writing, the balance of that one particular account is forgiven.
How much a business debt can be settled for depends on the debt type, the creditors involved, the total balance, the business’s asset value, and even sometimes the personal asset value of the owners. Negotiating a reduced settlement is far more routine and common than most owners assume. But remember that no two debts settle the same.
When business debt settlement becomes an obvious choice is usually pretty straightforward. Four or five months behind on payments with little hope of things improving are two big clues. A business that’s already closed or closing also has few other reasons to hesitate - sometimes, settlement is just the best way out of a bad situation.
The single biggest factor in business debt settlement is what happens to your company: are you staying open, or shutting down? If you settle a business debt while still operating, it will usually hurt your company’s credit profile, and it will likely show up on business credit reports like Dun & Bradstreet. Suppliers may see that and steer clear, assuming you’re a bad credit risk.
An open company should be selective about which debts are settled - you might not want all your vendors to know you made a deal with another vendor. A closed business, however, should look for a path that damages their financial future as little as possible.
Personal Guarantee
Many small business loans carry a personal guarantee, which basically means the owner’s personal assets are at risk if the business goes under. Often, putting your personal social security number on the application creates this personal guarantee.
Big bank corporate giants like Chase, Wells Fargo, American Express, and Capital One will typically ask for a personal guarantee. Alternative cash advance loan shops like Kabbage, OnDeck, CAN Capital, LoanMe, BizFi, Everest, and Quarterspot lean this way as well.
Be warned, though: a standard form loan doesn’t carry the same sort of hard guarantee, but it does typically still have a lien on the collateral you used to secure it. Business loans often have liens put on property, machinery or inventory. If you plan to stay open, you need to settle successfully once the payments get unmanageable - those are the assets you depend on to run your company.
Once you manage to pay off a written settlement, it’s gone forever - the business, any guarantors and related liens are released. From there, you can run your business however you like, with one less (or sometimes many less) payments to make every month.
Keep It Realistic
Although some are tempted to reach for settlement if they fall a month or two behind, jumping into this process too early can be a mistake. The overall problem with business debt settlement is that lenders and collection agencies generally won’t even consider negotiating unless a business can show it truly cannot pay. Also, settlement hurts credit, even for a business. Lastly, if you agree to a business debt settlement, it’s done, it’s permanent, it can’t be undone - be sure it’s a move you want to make.
It’s a myth that small business debts can be resolved for some tiny fraction of the original amount. “Settling for pennies on the dollar” used to be more realistic, say during the global financial crisis and the Great Recession. What’s important to understand now is that those deals are harder to come by, except maybe for people on fixed incomes like seniors. Best bet is to lower your expectations on this.
In the end, the key to business debt settlement is to keep it realistic. You settle with the money that you can find, that’s what is essential to understand about the process. Yes, reputable settlement firms sometimes reach savings near or above half of the total owed, but no lender is actually ever legally required to agree to anything.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
