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If you run a small business, chances are you’ve accumulated some debt over time. Debt is often a necessity to get a business off the ground. However, when debt becomes unmanageable, it can put the future of your company at risk.If you find yourself struggling under the weight of business debt, debt settlement may be an option worth considering. Debt settlement involves working with a debt settlement company to negotiate down your total owed balances. The goal is to settle accounts for less than you currently owe.While debt settlement can offer financial relief, it also comes with drawbacks and risks. Determining if it’s the right path forward for your small business is an important decision. Here’s what you need to know about business debt settlement and whether it could help dig your company out of debt.

How Does Business Debt Settlement Work?

Business debt settlement involves partnering with a settlement company to negotiate down balances you owe to creditors and vendors. The process typically works as follows:

  • You stop making payments on the accounts you want to settle and instead make monthly payments into a secured special purpose account. This helps fund the eventual settlements.
  • The settlement company contacts your creditors and seeks to negotiate a reduced lump sum payment to settle accounts (usually for 30-50% of what you owe).
  • If negotiations are successful, you make the agreed upon settlement payment to the creditor from the funds set aside in your special purpose account.
  • The creditor considers the account fully settled for the settlement amount, releasing you from further obligation.

Settlement companies charge fees based on a percentage of enrolled debt. They don’t collect fees until after settlements are reached. This gives them incentive to negotiate effectively on your behalf.

When Is Business Debt Settlement a Viable Option?

Debt settlement works best for businesses that meet certain criteria:

  • You have unsecured debt – Debt settlement does not apply to secured obligations like business loans or lines of credit. It’s intended for unsecured debts like credit cards, vendor accounts, judgments, past due taxes, and utility bills.
  • You have some funds available – To settle accounts, you need available funds to make lump sum settlement offers. This means having cash on hand or access to financing. Understand that settlement companies require you set aside regular monthly savings contributions to fund future settlements.
  • You have time – The debt settlement process usually takes several months to a few years depending on individual circumstances. This timeline allows you to save money to fund settlements. If you need immediate debt relief, settlement may not be feasible.
  • Your business is viable – A business struggling with temporary cash flow issues or financial hardship due to unexpected circumstances may benefit from debt settlement. However, if the underlying economics of your business are no longer viable, settlement just delays the inevitable.
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The Benefits of Business Debt Settlement

If your business meets the criteria above, debt settlement offers several potential benefits:Debt reduction – Debt settlement provides an opportunity to resolve unsecured debts for less than you owe. Settlement percentages often range from 30% to 50% of total balances. For some businesses, this reduction makes the difference in being able to continue operating.Affordable monthly payments – Monthly savings contributions required by settlement firms tend to be lower than minimum payments due on accounts. This greatly improves cash flow during the settlement period.Avoid bankruptcy – For some businesses, debt settlement offers a last chance to avoid declaring bankruptcy and the long-term consequences that entails. Settlement lets you resolve debt and move forward with a clean slate.Peace of mind – Finally developing a plan to address overwhelming business debt brings relief. And as accounts get settled, you achieve freedom from collection calls, lawsuits, liens, and constant financial stress.

The Risks and Drawbacks of Business Debt Settlement

While settlement can certainly help in difficult situations, business owners should also count the costs:

Credit score damage – When you stop making payments to creditors, your business credit profile will suffer. Missed payments, higher balances, and settled accounts all cause significant credit score damage that can take years to rebuild.

Tax consequences – Any amount forgiven in a settlement may be considered taxable income by the IRS. So while you reduce principal owed, you could still face a tax bill.

Collection lawsuits – From the time you stop making payments until accounts are settled, you are vulnerable to collection lawsuits from creditors. Settlement companies help defend against litigation, but it’s still a risk.

Settlement failure – There is always a possibility negotiations fail and accounts do not settle. This leaves you without savings set aside or other options to resolve that debt.

Higher settlement costs – The longer the settlement process drags out, the more fees accumulate based on total enrolled debt. Delayed or failed settlements increase your overall costs.

Limited financing options – With recent settled accounts on your business credit file, financing options are restricted to high-cost, high-risk sources if needed. This impacts your ability to access working capital.While settlement provides debt relief, it can seriously impair your business finances for years. Make sure you fully understand these consequences before moving forward.

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Questions to Ask Before Pursuing Business Debt Settlement

If you decide debt settlement is worth exploring for your company, here are some questions to consider upfront:

What type of debts do you need to settle? Gather details on all unsecured obligations you would enroll – account balances, minimum payments, interest rates, creditor names, account status, etc.

How much can you afford to save each month? Estimate how much your business can reliably set aside monthly to fund settlements. Remember much of this should come from new funds or financing rather than existing cash flow.

What is your current and projected business financial health? Take an honest look at the viability of your underlying business model, revenue, profits, and future outlook. Debt settlement works best for fundamentally healthy companies facing temporary setbacks.

How long can you operate without financing? Once accounts are enrolled, new financing options will be limited. Assess how long you can sustain operations through cash flow or bootstrapping.

What other options exist besides settlement? Fully investigate business debt relief alternatives like balance transfers, hardship programs, small business loans, or even bankruptcy to understand your options.Being able to answer questions like these helps determine if debt settlement makes strategic sense and lines up with the financial realities your business faces.

Partnering With the Right Settlement Company

If after thorough evaluation you decide to pursue debt settlement, choosing the right settlement company to assist you is critical.Watch out for settlement firms that overpromise with claims like “we can cut your debt in half with no negative consequences”. Reputable companies should explain in detail the realities of the process.Here are factors that matter most when vetting business debt settlement providers:

  • Experience helping small business owners – Look for firms with a strong track record specifically with small business clients over many years.
  • Legal compliance – Make sure the company follows all applicable state and federal regulations around debt settlement practices.
  • No upfront fees – Fees should only be collected after settlements occur. Avoid firms trying to charge large upfront setup costs.
  • Responsive expertise – The firm should assign you a knowledgeable representative who personally handles your account and is readily available by phone when needed.
  • Flexible savings terms – Since business finances fluctuate, the company should offer flexible monthly savings plans without locking you into rigid contracts.
  • Legal resources – Having access to business attorneys to defend against creditor lawsuits can determine success or failure during settlement.

As a business owner, the decision to pursue debt settlement is complex with many factors to weigh carefully. Take time to fully understand what’s involved. Ask questions upfront. Seek input from financial and legal advisors you trust. And if settlement seems viable for your situation, invest the time to identify an experienced settlement firm that prioritizes small business clients.

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Other Business Debt Relief Options

If debt settlement does not look right for your business, several other potential options exist to regain financial stability:

Hardship Programs – Many creditors offer short-term hardship programs to reduce or suspend payments for several months to give temporary relief. These programs won’t reduce principal owed, but they improve cash flow.

Debt Consolidation – Debt consolidation combines multiple high-interest debts into a single lower rate loan. This reduces monthly payments through better terms rather than settling balances.

Working Capital Loans – In some cases, accessing new working capital gives businesses experiencing temporary cash crunches the boost they need to pay down debts and regain profitability.

Balance Transfers – Transferring credit card balances to new accounts with lower introductory interest rates saves on finance charges. This again improves cash flow for debt repayment.

Bankruptcy – As a last resort, business bankruptcy through Chapter 7 liquidation or Chapter 11 reorganization may be an option. This provides legal protection while debts either get discharged or restructured.If you don’t think debt settlement is the right fit, discuss these alternative debt relief strategies with financial and legal professionals to find the best path forward.

Get Help From Delancey Street

Here at Delancey Street, our dedicated team has spent decades helping business owners find solutions for overwhelming debt. We know the turmoil excessive debt creates. We also know how to construct customized action plans that work based on a business’ specific circumstances.

  • If you believe debt settlement may help your small business contact us for a free consultation. We have extensive experience negotiating with even the most difficult creditors.
  • If settlement does not look right for you, we can advise on alternatives like consolidation loans, working capital financing, account restructuring and more.
  • In addition to direct debt relief assistance, we also provide financial education to help business leaders better manage finances long-term.
  • Getting control of debt takes expert guidance and commitment to change. At Delancey Street we stand ready to be your trusted partner for the duration of the process.

Do not let debt concerns distract you any longer from running your business. Call 212-210-1851 now to speak with a Delancey Street representative today about constructing your custom debt relief action plan. Or visit us online at for more information and to enroll for our services.

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