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Comparing Small Business Debt Consolidation vs Debt Settlement

If you run a small business, chances are you’ve accumulated some debt along the way. From business loans and lines of credit to credit cards and unpaid invoices, juggling multiple debts can be overwhelming. When you’re struggling to keep up with payments, debt consolidation or debt settlement may seem like attractive options. But how do you know which strategy is right for your business?

In this article, we’ll compare debt consolidation vs. debt settlement, including the pros and cons of each approach. We’ll also discuss some key factors to consider when deciding if consolidation or settlement is the best path forward for your small business debt.

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What is Debt Consolidation?

With debt consolidation, you take out one new loan to pay off multiple existing debts. This consolidates your debts into a single monthly payment, ideally at a lower interest rate. Here are some common ways small businesses can consolidate debt:

  • Small business loan – Banks and online lenders offer debt consolidation loans designed for small businesses.
  • Balance transfer credit card – Transfer balances from high-interest business credit cards onto a new card with an intro 0% APR period.
  • SBA loan – The U.S. Small Business Administration guarantees loans that can be used for consolidation.
  • 401(k) loan – Borrow against your company’s 401(k) plan at low interest to pay off debts.

The goal of debt consolidation is to simplify your monthly payments and save money on interest. By consolidating at a lower rate, more of your payment goes to paying down principal rather than interest fees. This can help you pay off debt faster.

Pros of Debt Consolidation

  • Lower interest rate saves money over time
  • Single payment is easier to manage
  • Can pay off debt faster
  • Doesn’t require negotiating with creditors
  • Won’t damage credit like debt settlement can

Cons of Debt Consolidation

  • Consolidation loans have fees and closing costs
  • Need good credit to qualify
  • Debt is not reduced, only restructured
  • Missed payments can worsen financial situation

What is Debt Settlement?

Debt settlement involves negotiating directly with creditors to settle accounts for less than the full amount owed. A debt settlement company will negotiate in your behalf to have debts reduced or waived entirely. Here’s a look at how the debt settlement process typically works:

  1. Stop making payments to creditors – This shows you’re having financial difficulty and gets creditors to the table.
  2. Open dedicated savings account – You make monthly payments into an account used to settle debts.
  3. Debt settlement company negotiates – They work to get your debts reduced or eliminated entirely.
  4. Creditors accept lump sum payment – The savings account is used to pay the negotiated settlement amount.

The goal of debt settlement is to resolve what you owe for pennies on the dollar. However, there are risks involved when you stop making payments on accounts.

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Pros of Debt Settlement

  • Debts can be settled for less than you owe
  • Total debt is reduced
  • Can settle without borrowing more money
  • Useful for unsecured debts like credit cards

Cons of Debt Settlement

  • Damages credit when accounts become delinquent
  • Creditors may sue if debts are not settled
  • Settled debt may be taxable income
  • Fees paid to settlement company even if debts are not settled

Key Factors in Deciding Between Debt Consolidation and Settlement

When weighing debt consolidation vs. debt settlement for your small business, here are some key factors to consider:

Your Credit Score

Debt consolidation often requires good credit to qualify for the new consolidation loan. Meanwhile, debt settlement assumes you have poor credit and cannot easily borrow more. Know where your business stands credit-wise before pursuing either option.

Types of Debt

Debt settlement works best for unsecured debts like credit cards, lines of credit, and unpaid invoices. Debt consolidation may be better for secured debts like equipment financing and business loans.

Your Timeline

Debt consolidation provides immediate debt relief, while debt settlement can take many months to negotiate settlements. Consider how quickly you need to address debts based on your business finances.

Risk Tolerance

Debt settlement carries the risk of getting sued if debts are not settled. And with debt consolidation, you take on the risk of a new loan. Know how much risk you’re willing to take on.

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Upfront Costs

Debt consolidation loans have upfront fees, while debt settlement companies charge monthly fees. Look at the total costs and compare to potential savings.

Impact on Business Credit

Missed payments and negotiated settlements may hurt your business credit score more than an orderly debt consolidation. However, the impact can be limited if settlements are done right.

The Best Option Depends on Your Situation

There’s no one-size-fits-all answer to whether debt consolidation or debt settlement is better for small business debts. The right option depends entirely on your specific situation, debts, timeline, risk tolerance and other factors. Carefully compare the pros and cons of each to determine the best path forward.

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Working with a credit counselor can also help provide guidance on managing business debt. They can review your full financial picture and debts, then make an impartial recommendation on consolidation, settlement or other strategies.

The most important thing is taking action to regain control of your small business debts. Evaluating debt consolidation vs. debt settlement is the crucial first step in developing a plan to eliminate debt and get your finances back on track.


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