Businesses like people also struggle with too much debt. Entrepreneurs would do anything to ensure that their small businesses do well, including taking expensive debt. However, taking debt may mean that they struggle to pay it back, and sometimes their business fails.
In fact, according to the Small Business Administration, about 50% of small businesses will fail in their fast five years of operation, mainly due to poor debt management, insufficient capital, and expensive debts.
For most entrepreneurs taking loans makes sense when they want to bolster expansions or cash flow. However, they may overwhelm themselves with too many loans without the capacity to pay them back. Sound borrowing decisions could help such entrepreneurs avoid the possibility of failing businesses.
Nevertheless, when creditors come asking what you owe them, it is too late to start evaluating your creditworthiness. Luckily there is a way to offload all or portion of your small business debts without filing for bankruptcy. It’s known as debt settlement, and with a little bit of knowledge, you can negotiate to pay a fraction of your debt.
What is Debt Settlement?
Debt settlement is an agreement between the borrower and the creditor in which they settle for paying back less than the total debt. It may surprise you to learn that creditors can accept less payment of the total debt. For instance, if you owe $10000, you can approach the creditor and negotiate to pay $5000 in return for a one-time payment, and they may agree to forgive the rest of the $5000.
You may also decide to hire a debt settlement company to negotiate on your behalf and avoid the daunting task of doing it on your own. They can help you get a good deal since they employ professional negotiators. It’s a great way to reduce your debt faster than you could have if you continued to pay to the fullest.
The Basic of Debt Settlement
A creditor may agree to forgo a substantial amount of the total loan because of two reasons. Either the creditor is cash strapped or the fear of your eventual inability to settle the entire balance. Either way, the lending company is trying to protect its financials.
If you are seeking debt settlement, you first have to get a substantial amount of money. The money attracts the lending company instead of waiting for small monthly payments for the next few years.
In case you decide to hire a debt settlement company, they require you to fill an online form for evaluation. If you qualify, their representatives will reach out to you and enroll you in their program. The process goes as follows:
- As the debtor, you have to explain your financial situation, which includes the total amount of debts and current income.
- The debt settlement company then advises you to make monthly deposits to an FDIC-insured account instead of making payments to the lender.
- Once your deposits reach a certain threshold, the debt settlement company approaches your creditor and offers to resolve your debt.
- If the lender agrees to the settlement, the debt settlement company deposits the money to the lender. The debt settlement company also retains a portion of your savings as a fee for their services.
It is also good to note that the debt settlement company’s fee is about 15-20% of your total debt. They are also not allowed to charge you before reaching a settlement agreement with your creditors.
How to Qualify For a Debt Settlement
Some loans do not qualify for debt settlement and include secured loans such as company car loans. Unsecured business loans may qualify, and the best way to know is to request a debt evaluation from the debt settlement company. Here is how to qualify:
- If you have unsecured loans of 7,500 and above. The loans include credit card loans or any other unsecured business loan.
- Your business must be a sole proprietor to qualify for a debt settlement, and the debt signed under your name.
- The business is struggling to make profits, and you are behind on your payments.
- Your business got into debt due to financial hardships that include insolvency or trying to keep it afloat.
What Are the Advantages and Disadvantages of Debt Settlement?
As an entrepreneur, there are several advantages to seeking debt settlement. These advantages include:
- You could pay less than what you owe the creditor: As in the above example, the borrower pays $5000 less than the total amount.
- Avoid filing for bankruptcy.
- You could save your business from debt in a short period.
The biggest drawback to debt settlement is that you could significantly impact your credit score. It also does not protect you from legal action from the creditor. Other disadvantages include:
- Debt settlement companies advise their clients to stop making payments to the creditor as a way of forcing them to settle. During the process, your loan will continue to gain interest and late payment fees.
- Debt settlement does not guarantee that your creditor will agree to offers from the debt settlement company.
- Savings from debt relief can amount to taxable income, and you could owe taxes to the government.
- Penalties of late payment and the accumulated interest could end being more than the initial debt.
With the prospect of growth, business owners take debt to balance their cash flow or expand. They can, therefore, have a hard time controlling debt. While you could negotiate your debt, there is a good chance that you could get a no.