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Business Debt Relief Glossary and Definitions

 

Business Debt Relief Glossary and Definitions

Common Types of Business Debt

Business Loan – A loan taken out by a business, often from a bank or online lender. Business loans have set repayment terms and interest rates.

Line of Credit – A flexible loan businesses can draw from as needed, up to a set limit. Interest is charged only on the amount used.

Merchant Cash Advance – A lump sum payment to a business in exchange for a percentage of future credit card and debit card sales. Not technically a loan.

Equipment Financing – Funding to purchase equipment like machinery and vehicles. The equipment serves as collateral if the loan isn’t repaid.

Business Credit Cards – Credit cards opened in a business’s name, useful for managing expenses but can quickly accumulate high interest charges if balances aren’t paid off.

Shareholder Loan – Also called an owner’s loan. Funds loaned to a business by its shareholders or owners. May have flexible repayment terms.

Accounts Payable – Money a business owes to vendors, suppliers, contractors for services or goods received.

Tax Debt – Unpaid taxes a business owes to state or federal tax authorities, including payroll taxes, sales tax, and income tax.

Options for Debt Relief

Debt Consolidation – Combining multiple business debts into one new loan with one monthly payment. This can potentially lower monthly payments but increase total interest paid over the loan’s duration.

Debt Settlement – Negotiating with creditors to pay a lump sum that is less than what is actually owed to have the debt considered “paid in full.” Can negatively impact credit score.

Debt Refinancing – Taking out a new loan to pay off an existing loan, ideally with better terms like a lower interest rate to reduce monthly payments.

Bankruptcy – A legal process where some or all of a business’s debts are discharged. Chapter 7 bankruptcy liquidates assets to pay creditors while Chapter 11 involves restructuring debts.

Debt Forgiveness – Creditors may agree to forgive a portion of debt owed to provide relief to struggling businesses. However, forgiven debt is usually considered taxable income.

Hardship Program – Some lenders offer hardship programs to temporarily reduce or suspend payments for businesses facing financial challenges. Interest continues accruing in most cases.

Key Terms Related to Debt Relief

Debtor – The person or business that owes money to creditors.

Creditor – The person, business, or institution that is owed money.

Principal – The original amount borrowed or owed, not including interest or fees.

Interest – The cost of borrowing money, charged as a percentage of the principal.

Default – Failure to make loan payments as agreed. Can result in penalties, increased interest, and credit damage.

Delinquency – Being late on a payment but not yet in default. Delinquencies negatively impact credit.

Debt-to-Income (DTI) Ratio – Compares minimum monthly debt payments to pretax monthly income. Used to evaluate ability to take on more debt.

Statute of Limitations – The window of time creditors have to sue for repayment of a debt. Varies by debt type and location.

Solvency – The ability to pay debts and other liabilities as they come due. Insolvency means being unable to repay debts.

Collateral – An asset pledged as security on a loan that can be seized if payments aren’t made.

Lien – A legal claim on an asset as security for a debt. Must be resolved before selling the asset.

Promissory Note – A signed agreement detailing repayment terms for a loan or debt. Serves as legal evidence of the debt.

Personal Guarantee – Agreement where a business owner personally guarantees repayment of business debts. The owner’s personal assets can be pursued.

Chapter 7 Bankruptcy – Business assets are liquidated and proceeds pay outstanding debts. Remaining debts are discharged. Business ceases operations.

Chapter 11 Bankruptcy – Businesses restructure debts while continuing to operate. Owners often retain control in exchange for repaying some debts over time.

Discharge of Debt – Release from the legal obligation to repay a debt. However, tax implications often still apply.

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