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Is Business Debt Relief Available for Startups and New Companies?

Is Business Debt Relief Available for Startups and New Companies?

Starting a new business can be an exciting yet daunting endeavor. As an entrepreneur, you likely have huge dreams and high hopes for your company. However, most startups face financial constraints, especially in those critical early years. Access to capital is essential for getting your business off the ground and funding growth. This often means taking on business debt through loans, credit cards, or other financing.

Relief Options are Limited for Startups

Most debt relief programs and protections weren’t designed with small or new businesses in mind. Filing for bankruptcy, negotiating settlements, or restructuring payments under the protection of courts tends to be a lengthy, expensive, and complex process. Lenders also view these actions as high risk, making future financing even harder to obtain.

Let’s look at three common debt relief strategies and why they may not be realistic for many startups:

Bankruptcy Filing

Filing for Chapter 7 or Chapter 11 bankruptcy does offer struggling business owners a chance to eliminate or restructure oppressive debts. The process involves liquidating assets to pay creditors, creating structured repayment plans, or reorganizing the business.

However, the legal and administrative costs of navigating bankruptcy can exceed $10,000 even for simple cases. The entire process also typically takes 6 months to 2 years to complete. Most startups can’t afford such expenses or delays.

Bankruptcy filings also remain on a business’s credit record for 10 years, scaring away potential lenders and investors. For entrepreneurs trying to build goodwill and opportunities, this is a non-starter.

Debt Settlement

Debt settlement provides an alternative route to eliminating debt outside the court system. The business owner works directly with creditors to negotiate reduced payoff amounts, often saving 40-60% on total balances owed.

But debt settlement also takes time, usually 12-48 months to complete negotiations across multiple accounts. And creditors have no obligation to accept settlement offers, putting startups at risk if negotiations fail. Most importantly, debt settlement requires reliable income over several years to accumulate the lump-sum settlements – a luxury few startups have.

Debt Consolidation

Borrowers can roll multiple high-interest debts into a single, lower-rate loan for easier management. In theory, this reduces monthly payments and total interest expenses.

However, debt consolidation depends on the borrower’s creditworthiness and income security – two things most startups lack. And while payments may decrease initially, the loan term gets extended so total repayment costs remain high.

Essentially, consolidation just kicks the can down the road instead of providing real debt relief. This works for some but ignores the underlying problems facing struggling startups.

Other Strategies for Startups to Consider

While formal debt relief programs remain out of reach, startups still have options to ease their debt burdens:

Seek Investor Funding

Seeking additional investor capital through equity financing allows startups to pay down expensive debts rather than accruing more interest. And investors may be willing to inject cash to save a promising but struggling startup.

Pitching investors has risks, as their infusion of cash usually means giving up partial ownership and control. But for startups facing unmanageable debts, it may be the lifeline needed to course correct.

Request Temporary Relief from Lenders

If a specific unexpected challenge triggered repayment problems, lenders may grant short-term relief on a case-by-case basis. Things like natural disasters, supply chain disruptions, or losing a major client can temporarily impact cash flow enough that a struggling startup simply needs time to recover. Asking lenders to pause or reduce payments for a few months may be possible, especially if no late payments exist yet on the account.

Liquidate Assets

As a last resort, selling assets like equipment, inventory, or even intellectual property generates cash to pay down debts. While liquidations don’t help cash flow in the long run, they quickly reduce high-interest debts that threaten short-term survival the most. Startups can then focus on rebuilding the sold assets over time as finances stabilize.

The key is only selling non-essential assets not vital to daily operations, avoiding as much disruption as possible.

Let Some Debts Default

Handpicking which debts to pay and which to default on is an option, albeit one that damages credit standing. As a last resort, defaulting on a high-interest merchant cash advance while continuing to pay business-critical vendors could make sense to conserve cash. The damage to credit scores still occurs, closing off future financing options. But for startups with no way to service all debts, selective defaults may buy time to improve cash flow.

Just know that lenders have long memories and still attempt to collect on defaulted debts through settlements or debt sales to collectors. Burning bridges with lenders should only happen when absolutely necessary.

Partnering With the Right Lenders Matters

While debt relief options are limited, partnering with the right lenders from the start makes a difference. Many traditional banks and online lenders offer awful terms and inadequate support because startups represent high risk.

But a new class of fintech lenders now cater specifically to startups and small business owners with customized products. Companies like Fundbox, BlueVine, and Clearbanc understand the unique capital needs and cash flow cycles of running a startup. They provide flexible working capital loans, lines of credit, and revenue-sharing alternatives to toxic debt like credit cards. These products help startups scale responsibly without the typical cash crunches.

The takeaway? All startups take on risk with debt financing – it comes with the territory. But partnering with startup-friendly lenders mitigates risk through transparent terms, flexible repayments, and products tailored to irregular cash flow cycles. Such lenders help startups avoid unmanageable debt piles from the outset. And in the worst case, flexible lenders have more incentive to grant relief than traditional banks with rigid requirements.

Conclusion – Think Carefully Before Incurring Significant Debt

At the end of the day, avoiding bad debt prevents the need for relief in the first place. Startups should carefully consider whether significant capital expenditures or growth initiatives require debt financing at all. Can you bootstrap a bit longer to validate the market opportunity first? Are there creative ways to test concepts without leveraging credit cards or loans? Perhaps a pivot to reduce overhead makes more sense than borrowing aggressively.

Debt undoubtedly plays a role in funding startups. But it also threatens their sustainability when not managed prudently from the start. Before committing to major financing, think critically about whether your startup model truly supports more leverage. If not, focus first on getting to cash flow positive operations with what you have before incurring obligations you may struggle to repay later on. The wrong debts can quickly sink even the most promising young companies.

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