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Dealing with business debt can be extremely stressful and overwhelming. As a business owner, you may have racked up significant debts – from business loans, to credit cards, to unpaid invoices. The financial pressures can feel inescapable.However, there are options. Business debt settlement may provide a path forward. This article will provide an overview of business debt settlement – what it is, how it works, the pros and cons, and more. We’ll also share actionable tips for navigating the process.
What is Business Debt Settlement?
Business debt settlement involves negotiating with creditors to pay off debts for less than the full amount owed. A business will work with a debt settlement company to put together a settlement offer – usually paying 30-50% of the total debt amount. If creditors accept the offer, the remaining debt is forgiven.For example, if a business owes $100,000 across multiple debts, they may offer creditors $50,000 as full settlement. This allows them to resolve debts they couldn’t otherwise afford to pay.Debt settlement does have risks, which we’ll explore more below. But for many businesses struggling with insurmountable debts, it can provide much-needed relief.
Key Benefits of Business Debt Settlement
There are a few key potential benefits that make business debt settlement an appealing choice:
- Pay Off Debts at a Discount – With debt settlement, businesses resolve debts by paying a fraction of what they owe – typically 30-50%, as mentioned. This leads to significant savings.
- Avoid Bankruptcy – For deeply distressed businesses, bankruptcy can have catastrophic consequences. Debt settlement provides an alternative path to find financial stability without resorting to bankruptcy proceedings.
- Stop Collection Activities – Once a debt settlement program is in place, collection calls and legal actions from creditors usually halt. This provides immediate relief.
- Improve Cash Flow – Debt payments are lowered significantly under a settlement, freeing up operating cash flow to reinvest in the business.
For businesses overburdened by debt, these benefits may make the risks worthwhile.
An Overview of the Debt Settlement Process
If you decide to pursue business debt settlement, what can you expect? The process generally involves several key steps:1. Review business finances – A debt settlement company will thoroughly review your business’ financial circumstances, including incomes, expenses, assets, debts owed, and more. This helps tailor a settlement strategy.2. Open dedicated account – You’ll open an account to save funds that will eventually go towards settlement offers. It’s usually a separate account from normal operating accounts.3. Stop paying unsecured debts – To accumulate savings, you’ll temporarily stop making payments on all unsecured debts settled through the program. Secured debts like mortgages aren’t included.4. Negotiate with creditors – Once sufficient funds have accumulated, the debt settlement company will negotiate with creditors on your behalf to settle debts at a discount.5. Settle debts – Finally, negotiated settlements are paid out from the dedicated account to creditors. Once a creditor accepts payment, the remaining debt balance is forgiven.This provides a high-level overview of the settlement stages. Execution takes strategic planning tailored to your unique financial circumstances.
Understanding the Risks and Downsides
While business debt settlement can seem like an attractive lifeline, it does come with considerable risks and downsides to weigh:
- Credit score damage – Not making payments on debts will cause significant credit score damage. However, for distressed businesses already struggling with debts, poor scores may be an existing issue.
- Tax liabilities – Debt forgiven through settlements may be treated as taxable income. Consult a tax professional to understand potential tax implications.
- Collections & lawsuits – Despite settlement efforts, some creditors may continue collection attempts through calls or lawsuits. Be prepared to negotiate with persistent creditors.
- High settlement fees – Reputable settlement companies charge 15-25% fees on enrolled debt amounts. For a $100,000 debt pool, for example, fees could exceed $20,000. However, this enables the deep discounts offered to creditors.
- Potential scams – As with any industry, debt settlement has its share of scam artists. Vet any settlement company thoroughly and read all contracts carefully before signing. Get references from past clients and consult trusted advisors.
While the savings can outweigh the costs, it’s critical to go in with eyes wide open. Debt settlement should not be viewed as an easy fix.
Finding the Right Business Debt Settlement Company
Choosing the right settlement company to partner with is absolutely vital. As mentioned, scams do exist. The company will also negotiate the settlements that determine how much you save.Here are some tips for choosing a reputable, skilled business debt settlement provider:
- Ask trusted advisors – Consult your accountant, lawyer, financial advisor, and other trusted business contacts. They may be able to suggest companies they have confidence in.
- Check certifications & memberships – Legitimate settlement providers belong to trade organizations like the American Fair Credit Council. They should also have legally-required state licensure.
- Review ratings & complaints – Research online reviews and complaints with oversight bodies like the Consumer Financial Protection Bureau and state attorneys general. Many complaints can suggest issues.
- Compare fee structures – Fees should be clear and consistent, rather than “hidden”. Opt for flat-rate fees based on debt enrolled rather than ongoing monthly fees.
- Request client references – Any good settlement company should be able to provide references from past client businesses. Follow up directly with these references on their experiences.
- Review actual settlements – Before committing, request examples of past settlements the company has negotiated, including before-and-after debt amounts. Higher discounts reflect greater negotiating skill.
Following these tips – in addition to reading all contracts extensively before signing – can help surface warning signs while identifying providers positioned to produce results.
Developing the Initial Settlement Strategy
Once you’ve chosen a reputable debt settlement partner, it’s time to develop the strategy. This initial blueprint will guide negotiations with creditors and determine the ultimate savings.There are two key components that shape an effective settlement strategy:
1. The dedicated settlement accountThis separate account will hold funds to eventually pay out settlements. It should be opened at a separate bank from normal operating accounts to shield funds from creditor collection efforts.The ideal settlement account setup includes:
- Sufficient contributions to fund target settlement offers within 24 months
- Automated monthly transfers from business accounts ensure consistency
- Statements sent to debt settlement company instead of business address
- Interest-bearing balance to maximize accumulation
2. Realistic settlement targetsBased on your total debts and expected accumulated savings, settlement targets need to be realistic. This requires accurately tallying all debts while projecting settlement account growth over 12-24 months.Debt settlement companies may promise unrealistically high discounts. Actual settlements tend to range from 30% to 50% off total debts owed.With these pillars in place – the dedicated account and realistic targets – negotiations can commence on the strongest footing.
Navigating Negotiations with Creditors
Settlement negotiations can be an intimidating process. The debt settlement company will handle talks, but knowing what to expect can help you brace for challenges:
- Persistent calls & letters – During settlement talks, creditors may continue attempts to collect on debts through calls and letters. Fielding these can be emotionally taxing. Be ready to enforce boundaries.
- Low initial offers – Early settlement proposals may start very low – 10% or less of total debts. This extended “back and forth” is normal. Don’t get discouraged.
- Lump-sum demands – Some creditors may insist on lump-sum payments rather than installments. Hold your ground if installments better match your financial capabilities.
- Final “exploding offers” – As final negotiations approach, creditors may present short-term exploding offers, pressuring you to accept on the spot. Avoid rash decisions.
While frustrating at times, viewing negotiations as a process and knowing tactics to expect can help you manage the stress. With a trustworthy settlement company leading talks, the finish line will come into view.
Life After Settlement: Rebuilding Credit & Operations
Once the settlements have been finalized and you can see light at the end of the tunnel, focus turns to the road ahead. Specifically, you’ll need to rebuild damaged credit while shoring up business operations.Here are some tips to rebuild smarter after debt settlement:
Credit recovery tips:
- Obtain secured credit cards to slowly demonstrate responsible use
- Explore credit-builder business loans to accumulate payment history
- Write goodwill letters to creditors showing changed circumstances
- Limit new credit applications until scores start rebounding
Business operations tips:
- Build operational reserves of 6+ months of working capital
- Update budgets with realistic projections and key financial ratios
- Explore alternative funding like SBA loans if growth capital is needed
- Meet with trusted advisors to adjust long-term business plans
The process will be gradual, but staying diligent provides the best chance at meaningful recovery. Most importantly, avoid the pitfalls that led to over-indebtedness originally.
Key Takeaways on Business Debt Settlement
Dealing with financially unsustainable debts puts immense stress on business owners. While far from easy, debt settlement can offer a path back to stability if performed strategically.Some key takeaways on business debt settlement:
- Debt settlement allows businesses to resolve unpayable debts for pennies on the dollar through negotiated discounts – typically 30-50% off total amounts owed
- To succeed, partner with reputable settlement firms, set realistic savings targets, and steel yourself through frustrating negotiations
- While settlement secured critical relief in the near-term, focus must shift to careful rebuilding of credit, cash reserves, and operations for the future
For businesses weighed down by debts but not ready for bankruptcy, settlement – despite its costs and frustrations – can provide a lifeline. Approach with eyes wide open, stick to the process, and with some luck you’ll find yourself back on solid financial footing.If you have questions, our team would be happy to offer guidance tailored to your unique situation. Reach out today to discuss your options.
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