Negotiating with Business Creditors[yoast-breadcrumb]
Negotiating with Business Creditors
If you’re a small business owner struggling to make ends meet, negotiating with your creditors can help free up some much-needed cash. While having this conversation can seem scary, going in prepared with the right strategies can set you up for success.
Here are some tips to help you get ready to negotiate with your creditors:
Prioritize your debts
Not all debts are created equal, so it’s important to prioritize which ones are most critical to tackle first. Generally, you’ll want to focus on secured debts (like equipment loans) and debts with personal guarantees before unsecured debts like credit cards or accounts payable. Going after the essentials gives you more leverage in asking for relief on the non-essentials.
Decide on a reasonable offer
Before picking up the phone, think through what payment plans or settlement offers you can realistically commit to. Look at your current cash flow and financial projections to come up with numbers. Often creditors will settle for less than the full balance, but be prepared to start higher and negotiate down. On average, experts say to expect to settle debts for around 55 cents on the dollar.
Contact your creditors
Don’t wait for creditors to come calling – be proactive in reaching out first. Explain your situation and proposal calmly and honestly. Have documentation ready to share on your financial status. Stress your desire to pay what you can rather than default. Be prepared for some initial resistance, but stay polite and keep negotiating.
Get any agreement in writing
After coming to a verbal agreement, don’t consider it final until you have it in writing. Follow up any conversation with a letter confirming the terms you agreed to. This protects both you and the creditor later on. Make sure to get signatures from all parties before moving forward.
Consider involving a third party
If you’re struggling to make progress on your own, consider hiring a credit counseling agency or debt settlement firm to negotiate on your behalf. They have experience navigating these discussions and can often secure better deals than small business owners can alone. Just be sure to research their reputation and fees first.
Know your rights
Before negotiating, understand your legal protections, especially if you need to wind down operations. There are specific processes creditors must follow in collecting debts. Consult a lawyer if you need help understanding your rights and navigating business closure.
Here are some laws and legal precedents to be aware of when negotiating with creditors:
Fair Debt Collection Practices Act
This federal law prohibits abusive debt collection tactics by third-party collectors. It covers things like harassment, false statements, and unfair practices.
State debt collection laws
Many states have their own debt collection laws providing additional consumer protections. For example, some limit how often collectors can call.
Filing for bankruptcy stops collections and can discharge some business debts entirely. Chapter 7 liquidation or Chapter 11 reorganization may be options if negotiations fail.
If your business is a separate legal entity like an LLC, your personal assets are generally protected from business debts unless you personally guaranteed them.
Knowing these protections allows you to negotiate from an empowered position – you have alternatives if creditors refuse reasonable offers.
Be persistent but flexible
Negotiations rarely go smoothly from start to finish. Expect some back-and-forth before reaching a deal. Don’t give up after the first “no,” but also don’t cling stubbornly to initial proposals. With some persistence balanced with flexibility, an agreement satisfactory to both sides is usually possible.
Consider debt consolidation
If you have multiple debts, a consolidation loan combining everything into one payment may simplify things. This swaps multiple creditors for just one. Be aware of the costs and risks, however – the new loan could have high fees and interest rates.
Keep your creditors updated on your situation, even if you can’t pay yet. The more you communicate, the more willing they may be to offer flexibility. Silence and avoidance only makes creditors suspicious.
Don’t sacrifice your credit score
Defaulting on debts can trash your business credit reports for years. Before stopping payments altogether, see if creditors will agree to reduced payments that still allow you to pay something each month. This protects your score.
Consider debt settlement companies carefully
Debt settlement firms promise to negotiate deals for you, but their services come at a steep price. They often charge hefty upfront fees and monthly service charges. Make sure to vet any company thoroughly before signing up.
The key is finding an ethical, reputable company that can actually deliver on its promises of reducing your debts. Debt settlement outcomes are not guaranteed. Research a company’s BBB rating, client reviews, fees, and success rate before committing.
Don’t wait until you’re desperate
Don’t wait until collections calls are constant and lawsuits are looming before taking action. Initiate negotiations with creditors early when you first start struggling. You’ll have more leverage and options the sooner you engage.
Consider debt mediation
If negotiating directly with creditors fails, debt mediation is another option. An independent mediator hears from both sides and tries facilitating a settlement. Mediation can provide a neutral middle ground when talks stall.
Know when to walk away
Sometimes, despite your best efforts, certain creditors may refuse to negotiate reasonably. If talks clearly aren’t progressing, reassess whether the debt is truly essential and worth further energy. Consider cutting your losses and walking away.
Don’t take initial rejections personally
Creditors usually start negotiations with lowball offers and rejections before eventually compromising. Don’t take it personally – it’s just a negotiation tactic. Politely stand your ground while also being willing to bend.
Consider Chapter 11 bankruptcy
For severe cases with overwhelming debts, Chapter 11 bankruptcy may be an option if negotiations fail. It allows restructuring debts under court supervision. However, it comes with major legal expenses.
Know the red flags of predatory lending
Desperate small business owners are vulnerable to predatory lenders making unrealistic promises. Watch for red flags like unusually high fees, balloon payments, or lack of transparency. Avoid anything seeming too good to be true.
Don’t rely on verbal agreements
Any negotiation deal reached should always be formalized in a written agreement, signed by both parties. Verbal handshakes mean nothing – get it in writing.
Negotiating with creditors can seem intimidating but is often essential for struggling small businesses. Follow these tips when preparing for critical conversations with your creditors. Know your rights, make reasonable offers, get help if needed, and don’t give up too quickly. With perseverance and a strategic approach, negotiating workable debt repayment solutions is very possible.
 How to Negotiate With Creditors for Small Business Owners – Accion Opportunity Fund
 How to Negotiate With Business Creditors – U.S. Chamber of Commerce
 Negotiating With Creditors: What You Should Know | Weisblatt Law
 Negotiate with creditors as a startup – FasterCapital