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Business Debt Consolidation vs Debt Settlement: Which is Better for Your Company?

Dealing with significant business debt can be incredibly stressful and make it difficult to focus on running your company. When facing large amounts of debt, many business owners consider debt consolidation or debt settlement as potential solutions. But how do you know which option is better for getting your business back on track financially? This article examines the key differences between business debt consolidation and debt settlement and provides guidance on choosing the right debt relief strategy for your company.

What is Business Debt Consolidation?

Business debt consolidation involves taking out one new loan to pay off multiple existing business debts. The goal is to simplify debt payments by rolling several debts into one new loan with one monthly payment.

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The benefits of business debt consolidation include:

  • Lower monthly payments. By extending the repayment timeline, consolidation loans reduce the total monthly payment amount. This improves short-term cash flow.
  • Single payment. Rather than tracking multiple loan payments per month, you make one payment to one lender. This simplifies the payment process.
  • Fixed interest rate. Debt consolidation loans typically have fixed interest rates, which provide predictability in loan repayment over the full term.
  • Potentially lower interest rate. By using business assets as collateral, it may be possible to obtain a consolidation loan with a lower interest rate than your current debts.

However, business debt consolidation also comes with risks, such as:

  • Collateral requirements. Lenders often require business assets like equipment, real estate, or invoices as collateral for the new loan.
  • Closing costs and fees. You’ll likely need to pay loan origination fees to secure a consolidation loan.
  • No reduction in total debt owed. While consolidation can reduce monthly payments, the total debt balance usually remains the same or increases due to closing costs/fees.

What is Business Debt Settlement?

Debt settlement, also called debt negotiation, aims to reduce the total amount owed to creditors. It involves working with a debt settlement firm who negotiates directly with your creditors to settle accounts for less than the outstanding balances.

The potential benefits of business debt settlement include:

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  • Lower balances owed. Creditors agree to accept a lump sum payment that is less than what you originally owed in exchange for settling the account. This reduces your total debt.
  • Avoid bankruptcy. Settling debt obligations can help struggling businesses avoid having to pursue bankruptcy.
  • Stop creditor harassment. The debt settlement company works directly with creditors on your behalf to resolve debts, acting as a buffer between you and creditors.

However, debt settlement also poses risks, such as:

  • Upfront and ongoing fees. Legitimate debt settlement companies charge 15% to 25% of the total enrolled debt amount in fees, which is only earned if settlements are secured.
  • Tax implications. The amount of debt forgiven by creditors may be considered taxable income by the IRS.
  • Credit score impact. Debt settlement leads to closed accounts in “settled” status which usually causes a credit score drop.
  • Potential for legal action. Creditors can still sue for debts owed while attempting to settle accounts. Following the debt settlement program is not a legal guarantee against creditor lawsuits.

Key Differences Between Business Debt Consolidation and Debt Settlement

Debt Consolidation Debt Settlement
Goal Lower interest rate to reduce monthly payments Negotiate with creditors to reduce balances owed
Impact on total debt owed Usually stays the same or increases due to fees Reduces total debt through negotiated settlements
Time to resolution Finish loan term (2-5 years) 12-48 months to negotiate settlements
Risk of legal action from creditors Low risk during loan repayment High risk until accounts settled in full
Upfront and ongoing cost Relatively low (origination fees) Very high (15-25% of total debt)
Credit score impact Limited impact Major negative impact

As shown above, the two strategies achieve very different goals. Debt consolidation aims to reduce monthly payments by lowering interest rates and extending repayment timelines, while debt settlement directly reduces account balances through negotiated lump-sum settlements with creditors.

Which Option is Better for Your Business?

There are several key factors to consider when determining if debt consolidation or debt settlement better meets your business needs:

Current Cash Flow

Debt consolidation loans can provide immediate financial relief by reducing total monthly loan payments. If cash flow is extremely tight currently, consolidation may be the most viable short-term option. Just beware of repayment terms longer than 5 years, as this can increase total interest costs over time.

In contrast, debt settlement requires having enough working capital to continue making payments on debts while settlements are negotiated. For businesses with very limited cash flow, debt settlement may not be realistic.

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Total Debt Amount

For businesses with smaller debts under $50,000, consolidation can effectively bundle multiple obligations into one manageable payment. However, for larger debt scenarios beyond six figures, the upfront and ongoing fees of debt settlement become more affordable in order to negotiate reduced balances, especially if creditor legal action seems likely.

Asset Protection

Since debt consolidation often requires business assets like equipment or property as collateral, companies aim to limit risk of asset seizure may want to avoid this option. Debt settlement does not put assets at risk.

Credit Score Importance

With debt settlement, your business credit score will drop significantly due to settled accounts being closed. If maintaining access to affordable financing options is critical, the credit impact of debt settlement could constrain future funding for years after completing the program.

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Tax Implications

One aspect of debt settlement often overlooked is the potential tax bill on settled debt. The unpaid balance forgiven by creditors may be considered taxable income. Business owners should consult a tax expert to understand possible tax consequences before committing to debt settlement.

Getting Help Evaluating Business Debt Relief Options

Trying to navigate complex debt scenarios on your own can be overwhelming for time-strapped business owners. Seeking guidance from a business debt relief expert is highly recommended when comparing debt consolidation vs debt settlement.

Reputable credit counseling agencies like InCharge Debt Solutions offer free consultations to examine your unique situation and provide tailored advice on managing business debt. Their certified credit counselors can clarify how consolidation loans work, detail the debt settlement process, and help determine which strategy aligns best with your financial objectives.

In some cases, a hybrid approach combining targeted debt consolidation to improve cash flow while also settling certain severely delinquent accounts may produce optimal results. The right adviser can show you how to integrate different forms of business debt relief to solve cash flow struggles, reduce high balances, and avoid bankruptcy.


Both debt consolidation and debt settlement offer ways for struggling business owners to regain financial stability, but through very different strategies. Key factors like current cash flow, total debts owed, asset protection needs, credit score impacts and potential tax implications must be assessed to select the best debt relief approach for your small business. Seeking guidance from credit counseling professionals can help you understand all options and build a tailored business debt relief plan integrating consolidation, settlement, or both that aligns with your company’s unique situation.


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