Debt Relief Programs Compared Small Business Loans[yoast-breadcrumb]
Debt Relief Programs Compared to Small Business Loans
Getting out of debt or securing funding for your small business can be challenging. Two options to consider are debt relief programs and small business loans. This article from Delancey Street will compare the pros and cons of each, so you can determine the best path forward.
Overview of Debt Relief Programs
Debt relief programs help consumers settle unsecured debts like credit cards, medical bills, and personal loans for less than the full amount owed. They negotiate with your creditors on your behalf to reduce the total debt burden.Some key things to know:
- You’ll stop paying your creditors directly and instead save up for settlement offers in a dedicated account. This can hurt your credit score but may help you settle for less.
- Fees are typically charged as a percentage of enrolled debt, often 15-25%. So $10K of debt would incur $1,500-2,500 in fees.
- Your creditors may sue you during the program, but a good debt relief company provides legal support.
Debt relief can provide relief from overwhelming debts, but be cautious of scams. Legitimate companies won’t charge upfront fees or make unrealistic promises.
Overview of Small Business Loans
Small business loans provide funding that can be used for various business purposes like payroll, equipment, renovations, and more. The two main types are:
- SBA Loans: Offered by the Small Business Administration, these loans come with guarantees and other incentives. The main types are 7(a), 504, and microloans.
- Conventional Loans: Offered by banks/lenders without SBA backing. These include term loans, lines of credit, and invoice financing loans.
Interest rates, terms, and eligibility requirements vary. A credit check and collateral may be required.
Here are some key ways debt relief and small business loans differ:
- Purpose: Debt relief eases unsecured personal debts, while small biz loans provide business funding.
- Eligibility: Debt relief is for consumers with unsecured debt burdens. Small biz loans have requirements like time in business.
- Cost: Debt relief has fees based on enrolled debts. Biz loans charge interest and origination fees.
- Credit Impact: Debt relief may hurt your personal credit. Small biz loans check business credit.
- Collateral: Debt relief is unsecured. Small biz loans often require collateral like equipment.
Which is Right for You?
So how do you choose between debt relief and a small business loan? Ask yourself:
- Do I need to reduce personal debts like credit cards? If so, a debt relief program may help.
- Do I need funding to grow my business? If so, explore small business lending options.
- Can I qualify for a small business loan based on my credit/history? If not, debt relief may be a better fit.
- Can I afford the fees charged by debt relief companies? If not, a small biz loan with interest may be more affordable.
Speak to a financial advisor to discuss your specific situation. But in general:
- If you have overwhelming personal debts, debt relief may provide relief. Just be cautious of scams.
- If you need funding for business purposes, small business loans can provide financing, if you qualify.
Pros and Cons of Debt Relief Programs
- Settles unsecured debts for less than owed
- Stops collections calls and lawsuits
- Provides legal support if sued
- Helps when you can’t repay debts in 5+ years
- Damages your credit score
- Creditors may refuse to negotiate
- Risk of scams and hidden fees
- Taxed on forgiven debt
Pros and Cons of Small Business Loans
- Provides funding for business needs and growth
- Variety of loan types based on purpose
- SBA loans come with guarantees and incentives
- Allows you to build business credit history
- Requirements like time in business and collateral
- Debt remains and interest/origination fees are added
- Personal credit check required for some loans
- Defaulting can hurt your credit and put assets at risk
Alternatives to Debt Relief
If you don’t want to use a debt relief company, some alternatives include:
- Contacting creditors directly for hardship programs
- Using a non-profit credit counseling agency
- Trying strategies like balance transfers or debt consolidation loans
- Working with a bankruptcy attorney if options are limited
Applying for Small Business Loans
When applying for a small business loan:
- Have your business plan, financial statements, and required documents ready
- Check lenders like banks, credit unions, and online lenders
- Compare interest rates, terms, fees, collateral requirements
- Consider both SBA and conventional loan options
- Improve your personal/business credit score if possible
Getting professional support can help ensure you make the best financial decision for your situation. Contact Delancey Street today to discuss your specific needs.