The world of entrepreneurship is quite dynamic. When you have your desired access to capital, it’s one of the biggest lifelines for your business but at the same time it’s a liability that you have to deal with. Even though business loans are important for the survival and growth of a company, they still can become burdensome at any point especially when the market is taking a shift and your revenue is dropping. If you are dealing with mounting debt then debt settlement is the ultimate solution that’ll help you recover financially.
Understanding Business Debt Settlement
Business debt settlement means that the borrower negotiates with the creditor or lender to reduce the debt amount. Unlike restructuring and refinancing where modifications are made to the debt terms, in debt settlement, you have to pay a lump sum amount less than the total outstanding balance and your debt will then be considered “paid” or “settled”.
Businesses usually go for debt settlement when it’s their last resort and they are in distress where managing monthly repayments is getting difficult. If a business is unable to meet its current debt obligations, they have to face the possibility of declaring bankruptcy which can cause unimaginable damage to the company. Here, debt settlement is the easier and better alternative because it comes with lesser damage than bankruptcy or defaulting.
When Should A Business Consider Debt Settlement?
Debt settlement isn’t for every business. Sometimes it can cause more damage than good which is why you should only consider it if you really are struggling with your finances. Here’s when it’s appropriate to use this strategy;
- It’s getting tough for you to manage your monthly payments
- The business isn’t generating much revenue
- Creditors are threatening the owner with legal actions or planning to forward the debt to collections
- When you have exhausted all refinancing and restructuring options
- You don’t want to declare bankruptcy and want another alternative instead
Step By Step Guide For A Successful Business Debt Settlement
There’s absolutely no doubt in the fact that debt settlement can bring businesses relief but it’s an exhausting process and if you want the negotiation to go through, you have to be careful with the process. Here’s a step by step guide that explains how you should start the settlement;
1-Evaluation Of Your Financial Health
A good start to a debt settlement would be to first evaluate where you stand financially. All you need to do is to assess your total debt, the monthly repayments, the interests and the overall picture of your business and its cash flow. When you know how much you owe and how much you are making monthly, it’ll be easier for you to have a clear picture of your repayment capabilities.
2-Contact Your Creditor Or Involve A Debt Settlement Company
The next step is to approach your creditor with your offer and talk about settling your debt. If you aren’t ready to deal with all the stress of negotiation then it’s best that you hire a debt settlement company instead. With a settlement company you can expect a positive outcome as these companies are experienced and they know how to tackle your creditor professionally.
3-Negotiate Your Terms
The most crucial step of the process is the negotiation. Make an offer to your creditor and start low i.e, 30% or 40%. The reason why you should make a low offer first is that creditors usually reject the initial offers because they want to recover as much money as they can from you. Your creditor will probably ask you for 50% or 60% and that’s exactly the reasonable and realistic percentage that you should pay in a debt settlement.
4-Make The Payment
It’s best if you opt for a lump sum payment instead of a monthly payment plan because eventually, you’ll get stuck again with the repayments even if your debt is reduced. In a lump sum, you just make the payment once and then you are done with the debt forever. You have to honor the agreement no matter what or else it can worsen your financial situation and you might even have to face legal actions. To avoid any delays in the settlement, make sure that you’ve saved up enough to make the lump sum payment before the due date.
5-Get The Agreement In Writing
You should always get the agreement in writing. A written confirmation that your debt will be reported as “settled” or “paid in full” is of utmost importance. This means that the creditor won’t be able to pursue any more collections and you will be done with the debt once and for all.
Useful And Effective Tips In A Business Debt Settlement
Here are some useful tips that can really be a game changer for you in your debt settlement negotiation with your creditor;
- Be Transparent: You have to be honest with your creditor regarding your financial situation. If your creditor knows the kind of distress you are dealing with, he’s more likely to accept your offer and work on a settlement with you.
- Have Your Settlement Budget Prepared: In order to make a compelling lump sum offer, it’s best if you start saving and securing your funds before time. Once you have the amount prepared, you should then start the settlement process.
- Leveraging Competition: If you are dealing with multiple debts and multiple creditors, it’s best to let them know or at least show them that the other creditors are settling for less. It’s a great way to increase the power of your negotiation.
- Use A Debt Settlement Company: If you want to add credibility and more power into your negotiation then it’s best to hire an attorney or a debt settlement company. Companies like Mountains Debt Relief can work wonders when you are in a dire need to reduce your debt.
- Stay Professional And Keep Calm: During a negotiation, don’t let your emotions take the best of you. Becoming aggressive or too emotional can lead you to unwanted consequences so it’s best to stay professional and be polite with your lender.
The Effect Of Business Debt Settlement On Your Credit
The best part about a debt settlement again is that it reduces your debt and you are free from debt, once and for all. However, there’s a downside to it too and that is the negative impact it causes to your credit. Any debt relief option will damage your credit score and history and the same is with settlement. Initially, you’ll see a dip in your credit score due to late or missed payments. After the settlement, your score will further reduce and the “Settled” account will stay on your report for 7 years.
Fortunately, the damage isn’t permanent and you can always start rebuilding your credit just by showcasing a financially responsible behavior. You can take multiple measures to rebuild your score like getting a secured card, making your payments on time and keeping your credit utilization ratio below 30%. Moreover, in a business debt settlement, sometimes the forgiven amount is considered taxable by the IRS which is something most people are unaware of. It’s best to hire a financial counselor or an advisor to get a clearer picture of how the settlement will affect you and whether or not you’ll have to deal with tax implications.
Final Word
If you as an entrepreneur are overwhelmed by the mounting debt and are facing financial struggles all at the same time then debt settlement can be a lifeline for you. Debt settlement isn’t risk free but again, it’s still better especially when you are at the edge of declaring bankruptcy. To ensure a seamless and smooth settlement, you have to evaluate your financial situation first, consider the potential impact on your credit and prepare for the lump sum payment before time. In a nutshell, you should do all the preparations first before starting a negotiation. The more prepared you are, the more successful your settlement negotiation would be.
FAQs
Q1. What Happens If You Never Pay Debt?
Not paying your debt shouldn’t ever be an option. If you continue to ignore the piling debt, your account will go into default and the creditor will send your balance into collections which is no less than a nightmare. Moreover, it’ll bring down your score and in the worst case scenario, your creditor might take a legal action against you.
Q2. Is Business Debt Settlement Legal?
Yes, debt settlement is legal in most of the jurisdictions. However, to protect your business interest, it’s best if you talk to a professional financial advisor or a counselor before settling your debt.
Q3.How Long Does The Debt Settlement Process Take?
The process takes around 3 to 12 months but the exact timeline depends on your creditor, the number of debts you are settling and the lump sum you are offering.