When your business’ profits are down (or revenue is down, or the costs of supplies and materials have gone up), it can seem like paying down the business debt is impossible. There is pressure from your lender to keep up payments on time and without a hitch. So it’s natural that the first thing the owners we talk to at Delancey Street want to know is whether settling actually works. But the truth is that debt settlement isn’t always successful. More specifically, there’s no official success rate for business debt settlement. Because business debts, the owner’s finances, and the settlement process can vary, it’s impossible to define a specific business debt settlement success rate. A lot of things influence your negotiation, so it’s hard to say exactly what kind of result you should expect.
That doesn’t mean the odds are against you. After all, a creditor would much rather receive something than nothing. This is especially true when the creditor doesn’t want to go through the expensive process of collection and litigation. Some lenders are hesitant to lower the loan amount, but they are much more likely to accept something rather than risk not collecting any of the money owed at all. This means that as a business owner, you have a chance of reaching a reasonable settlement.
A “Successful” Debt Settlement
What does a “successful” settlement look like in dollars? When you negotiate for a smaller payoff, some creditors will take around 40-60% of what you owe. Others might insist on a minimum of 80%. But some creditors won’t budge.
But successful debt settlement doesn’t always mean getting a lower balance. It can also mean getting a lower payment amount. For some, paying less each month might be more important than paying less overall. For example, you might be able to extend the term of your loan by another few months, or even another year or two. This often leads to a lower payment. In other cases, you might be able to refinance the debt to obtain a lower interest rate. Or, if you’re near the end of the term on your loan, the creditor might simply take a lump sum payment of a lower amount rather than trying to collect the balance. Lowering the balance, extending the term, or lowering the interest rate? What would work best for your situation? A “successful” debt settlement is when you end up with an agreement you can live with.
Prepared Businesses Have a Leg Up
Whether you get any of those outcomes depends a great deal on what happens before you ever pick up the phone. When considering debt settlement, it’s important to understand the different types of debt you have and the terms attached to each. For example, a loan from an online lender may use your real estate or equipment as collateral. An SBA loan can have different terms based on the amount and purpose of the loan - for example, a seven-year loan for equipment or a 25-year mortgage on commercial property. You may have a business line of credit that you can no longer afford to pay the interest on. Understanding your loan can help you negotiate.
Then look at your own side of the ledger. You can prepare for a negotiation by understanding how much money you have and are making in the short term. To do so, you need to get an accurate picture of your business profits. Prepared businesses have a leg up.
Once you know what you owe and what you can afford, reach out to the creditors and make them aware of any issues you’re having. This will set the stage for a successful negotiation. And you have much more success when you call the creditor with an offer ready and your loan terms right in front of you. When the business owner can give the creditor an idea of what they can afford, the bank can at least feel like they are getting something out of the relationship.
Should you do all of this yourself? You’ll get more traction with someone who understands the law. When you hire a settlement professional, they have a clear understanding of the applicable law and your rights as the client. It gives them more bargaining power in negotiation with the creditor. Some debt settlement companies are not reputable. Take your time, get a sense for who they are, and what the deal is like. Start with a consultation to at least get some advice.
Following Through
Reaching a deal is only half the job, though. Following through is the other half. That means you need to get a copy of the agreement with all the terms outlined before you have to pay any money. And you can’t miss a payment. All payments must be made on time. The agreement outlines the terms of the settlement, so there is accountability for both parties involved. However, if a payment is missed, the agreement can be rescinded by the creditor. You have to make good on your word once you get the agreement. You must pay the exact amount that you agreed to in the settlement either as a monthly payment or as a lower sum in total. This will have a lesser impact on your credit score and you can stop worrying about the debt.
So, what are your odds? The bottom line is that you can’t rely on a business debt settlement success rate. But if you understand the types of debts involved and the terms attached to those debts, you can set yourself up for success. A successful outcome ultimately depends on your debt, your finances, your readiness, and your ability to continue paying what you agree to for as long as the agreement requires.
Delancey Street is a business debt settlement company. We’re not a law firm. We were founded by an attorney, business debt-relief experts, and former merchant cash advance industry executives. Our initial consultation with you is free and entirely confidential. If you don’t have a case that we can win, or there’s a less costly way to handle things, we’ll tell you right on that first call. We’ll also refer you to a trusted, independent attorney if we think litigation - or bankruptcy (like Subchapter V) - is the right move.
