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Small Business Debt Relief: Options to Help Your Company Get Back on Track

Running a small business can be tough, especially when it comes to managing finances. Many entrepreneurs take out loans or use credit cards to help cover costs in those critical early years. But if sales don’t meet projections or unexpected expenses arise, suddenly that debt can become unmanageable. Don’t panic – there are options to help relieve some of that financial burden so you can get your business back on stable ground.

Understanding the CARES Act and SBA Programs

In response to the economic impacts of COVID-19, Congress passed the CARES (Coronavirus Aid, Relief, and Economic Security) Act in March 2020. This legislation included over $377 billion in relief funding specifically for small businesses, including expanded options for SBA loans as well as some temporary debt relief programs.One of the key provisions was the Small Business Debt Relief Program, which provides automatic payment relief for existing non-disaster SBA loans like 7(a), 504, and microloans. For loans not currently on deferment, the SBA makes six months of principal and interest payments for the borrower. For loans with deferment, the relief kicks in once deferment ends. This allows business owners to retain that cash flow for other operating expenses during these difficult times.New borrowers can also take advantage of this program if they apply and are approved for one of these loan products before September 27, 2020. Then the SBA will cover all principal, interest, and fee payments for six months.Essentially this aid helps provide some temporary relief so small business owners can focus on keeping their operations running instead of stressing about looming debt payments. Just be aware it does not apply to Economic Injury Disaster Loans (EIDL) or Paycheck Protection Program (PPP) loans.

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Seeking Concessions from Lenders

If your small business has existing loans or lines of credit from traditional lenders like banks, credit unions, or online lenders, know that many of these institutions have implemented special programs or provisions to help customers impacted by COVID-19.For example, many lenders are allowing customers to defer payments for 30-90 days with no adverse impact on credit scores or ratings. Others may let you extend loan terms in order to lower monthly payments. Or you may be able to pause payments on just the principal portion while still paying interest.The first step is being proactive and actually contacting your lenders to explain your situation and ask about any coronavirus-related assistance programs. Provide documentation about how your revenue and operations have been impacted. The more detail you can give, the better your chances at getting some type of concession.Most lenders want to help retain viable customers, so if you’ve historically paid on time and they believe you can eventually recover, they’ll likely want to work with you. Be prepared to discuss updated cash flow projections, cost cutting plans, or other ways you intend to keep the business moving forward.

Utilizing Credit Cards Strategically

For many small businesses, credit cards play a major role in covering operating expenses. If you have existing balances and are continuing to rely on credit, be very strategic during this time.See if issuers can provide relief such as waived late fees, lowered interest rates, or temporary limits on balances before interest kicks in. Ask about hardship programs specifically for COVID-19 circumstances.If possible, avoid putting any additional expenses on your cards until revenue stabilizes, as that debt can be costly. But also recognize cards provide an emergency source of capital if absolutely needed. Just have a plan for eventually paying down balances.

Debt Consolidation and Settlement

If you have multiple debts across various products and lenders, debt consolidation may be an option to simplify payments. This involves taking out one new loan to pay off the existing obligations, ideally with better terms. Often the rate, fees, or duration make consolidation loans beneficial.Banks, credit unions, and alternative online lenders like LendingClub or Prosper offer consolidation products. Peerform specializes in consolidating small business loans specifically. The application process can typically be completed online in just a few minutes.Debt settlement is another avenue gaining traction right now. This involves working with a specialty company that negotiates directly with your creditors to settle outstanding balances for less than what’s owed. The accounts get closed and you make monthly payments to the settlement firm until the revised balances are paid off.Just keep in mind the settlements generally require lump sum payouts from the company to the creditors, while you make payments to the company over time. So there is often a period of a few months before accounts start getting resolved. In the meantime, creditors may continue attempts to collect on the debts.

Creating a Debt Management Plan

Before pursuing new loans or programs to address outstanding debt, it’s wise to start on the inside by looking at what’s currently happening within your business. Gather details on all existing balances, interest rates, monthly payments, terms and timelines. Create a spreadsheet to easily see the big picture numbers.Then craft a debt management plan that allows you to streamline payments in the near term while steadily paying down balances over the long run. This may involve some concessions from lenders, strategic use of credit cards, consolidating amounts, and aiming to boost revenue or cut costs in order to cover payments.The important thing is to lay out a realistic plan instead of ignoring the obligations or hoping they’ll sort themselves out. This proactive process can help you structure debt in a manageable way.

Exploring Alternatives to Bankruptcy

While the financial strain from COVID-19 fallout could force some small businesses into bankruptcy, most owners understandably want to avoid that outcome. The process entails legal complexities and can leave lasting damage on personal credit.Some alternatives beyond what we’ve already covered include:

  • Asking investors for more capital: If you have existing investors or partners, explain the situation and current challenges and discuss the possibility of them providing additional short-term capital in order to keep operations running.
  • Seeking an emergency business grant: Federal, state and local governments as well as some private organizations have set up special emergency grant programs to support small businesses through the pandemic. Grants do not need to be repaid like loans.
  • Using receivables financing: If you have outstanding invoices from customers, receivables financing allows you to essentially sell those unpaid invoices to a funding company in exchange for immediate capital. Once customers pay, the funder takes their cut and forwards the balance to you.
  • Pursuing community resources: Check if your local economic development agency or small business development center offers any emergency funding, low-interest loans, or additional debt relief resources.

The goal is to thoroughly research and utilize every option possible before making the decision to wind down operations. With some creativity and determination, you may be able to structure the debt and access enough capital to give your business more time to recover and move back toward growth.

Overcoming Small Business Debt

Taking on debt is often unavoidable for small business owners, especially when trying to bridge the gap between expenses and revenue in those early stages. But too much debt relative to income over an extended period can put immense strain on a company’s chances for survival and success.If the debt burden starts becoming unmanageable, the tips and options covered above can help you regain control and stability:

  • Learn about SBA relief programs and CARES Act provisions
  • Seek concessions from traditional lenders
  • Use credit cards strategically
  • Explore debt consolidation/settlement
  • Craft a detailed debt management plan
  • Consider alternatives to bankruptcy

With a proactive approach and some outside assistance, many small businesses can overcome debt struggles and eventually reach healthier financial ground again. Don’t wait until options narrow further – take steps today to shore up your situation as much as possible.This challenging period won’t last forever. Tap into available resources for aid, adjust operations wherever you can, keep communicating openly with your lenders, and know there are always possibilities to transform obstacles into opportunities.

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