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Will Debt Relief Hurt My Business’s Ability to Get Financing in the Future?

Getting into overwhelming debt is an unfortunate reality for many business owners. As you struggle to keep up with payments, make payroll, and cover other expenses, debt can quickly snowball out of control. At some point, you may start looking into options like debt relief or debt settlement to find some breathing room.

But will taking advantage of debt relief impact your business’s ability to secure financing down the road? This is an important question to ask. After all, access to credit is often vital for managing cash flow, investing in growth, and weathering economic downturns.

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The short answer is maybe. Debt relief and debt settlement can potentially hurt your business’s credit and make lenders more hesitant to work with you. However, the damage isn’t always permanent or prohibitive. With some strategic planning, you may still be able to finance your business after debt relief.

Let’s take a closer look at how different debt relief options could impact future financing, as well as tips for minimizing any fallout.

How Debt Relief Programs Impact Credit and Financing

Not all debt relief programs work the same way or have the same effect on your credit. Options like debt management plans, debt consolidation loans, and debt settlements can impact your business’s credit score and loan options differently.

Debt Management Plans

Enrolling in a debt management plan (DMP) through a non-profit credit counseling agency often won’t hurt your credit score. As long as you stick to the personalized payment plan and pay down debts in full, there is no negative reporting to the credit bureaus.

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In fact, successfully completing a DMP can actually help credit by getting accounts current and lowering balances. This may make lenders more willing to approve financing. Just be aware that some lenders view borrowers in DMPs as higher risk, so you may not get the best rates.

Debt Consolidation Loans

Debt consolidation loans allow you to roll multiple debts into one new loan, often with better rates and terms that help lower monthly payments.

If you qualify for a debt consolidation loan, this likely won’t hurt your credit or financing options significantly. As long as you keep up with new loan payments, you are showing lenders you can responsibly manage debt.

However, falling behind on consolidation loan payments can quickly tank your score and chances of getting approved for financing. And if you already have poor credit, you may struggle to get a consolidation loan in the first place.

Debt Settlements

Of all the debt relief options, debt settlements often have the most damaging effects on credit and the ability to secure financing down the line.

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Here’s why:

  • Debt settlements require falling behind on payments first so creditors will negotiate – this dings your credit.
  • Settled accounts may be closed with “settled for less than owed” notations – another credit ding.
  • Settlements cut your available credit – lowering your credit utilization ratio.
  • Missed payments can stay on your credit history for 7 years.

With late payments, closed accounts, and other negative marks reporting to credit bureaus, debt settlements can send credit scores plummeting by 100 points or more. And most lenders are hesitant to work with borrowers fresh out of debt settlement programs.

So if you settle business debts, expect to have a very difficult time qualifying for financing anytime soon. Lenders will see you as an extremely high-risk borrower who recently defaulted on obligations. You’ll likely need to rebuild credit slowly over a few years before financing is within reach again.

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Tips to Minimize Damage of Debt Relief to Future Financing

If your business is drowning in unsustainable debts, debt relief may feel like your only lifeline right now. Just know that these programs could toss up roadblocks to financing later on.

Here are some tips to help minimize damage if you do opt for debt relief:

  1. Ask lenders about exceptions for borrowers who complete credit counseling or DMPs. While these programs impact lending standards, some institutions may grant exceptions if debts have been paid as agreed.
  2. Get everything in writing from debt settlement companies before stopping payments. Understand exactly what settled debts could mean for credit and future borrowing. Read the fine print!
  3. Prioritize paying down debts not included in relief programs first. Keep current lines of credit open and in good standing whenever possible.
  4. Start rebuilding credit slowly right away. Make sure all unsettled debts stay current going forward. Dispute any inaccurate information reported to credit bureaus.
  5. Wait 1-2 years after debt relief programs before applying for major financing. Give yourself time to re-establish positive payment histories and qualify for better rates.
  6. When the time comes, shop around extensively with various lenders, including small banks and credit unions. Compare financing terms and explain your situation for potential exceptions. Cast a wide net!

The Bottom Line

Debt relief can provide much-needed breathing room and reduce unmanageable monthly payments. But these programs, especially settlements, often torpedo credit scores and lending eligibility on the tail end.

If you want to preserve options to finance growth, investments, or operations down the road, explore alternatives like budgeting, credit counseling sessions, side hustles, or plain old grit and fiscal discipline first. The journey will be long and difficult, but may allow you to pay debts in full without decimating credit.

However, if debts balloon completely uncontrollable and relief programs are your last resort, just understand consequences to future borrowing. Work closely with reputable agencies, get everything in writing, keep accounts current going forward, and take time to slowly rebuild credit over the next few years.

With some patience and perseverance, you can recover from debt relief and eventually secure financing again. But the process won’t happen overnight, so adjust plans and expectations accordingly. Just know there is light at the end of the tunnel!

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