Business Debt Relief for Small Business Owners: 11 Options to Consider

Business debt is a normal part of running a company, and it's often not something to worry about. If you're able to comfortably make the payments each month and your business is growing, you'll probably be able to pay back the debt without any issues. That borrowed money could be just the thing to take your small company to the next level.

Some people find themselves facing an unexpected downturn or setback that limits their cash flow. If you're in this situation, you're not alone and you're not out of luck.

Several options are available to help you get back on a secure financial footing, including business debt settlement, debt consolidation, or bankruptcy. Some of these strategies enable you to continue operating your business while you sort things out.

The top thing to remember is that you're in charge. You get to choose the debt relief program that's right for your business. Understanding all your options is key to making the right call for your company.

What Is Business Debt Settlement?

Business debt settlement is a negotiated agreement between a company and its creditors to accept a one-time payment for less than the full balance owed. It's one of several ways a struggling business could get rid of debt, alongside options like debt consolidation, a debt management plan, or bankruptcy.

Debt settlement works best for unsecured business debt, such as credit cards or merchant cash advances, because those creditors have less to fall back on if a business closes or files for bankruptcy. Settlement savings vary by creditor and situation, and no company can promise a specific percentage or dollar amount in advance.

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Types of Business Debt That Qualify for Settlement

The right debt relief strategy for you depends in part on the type of debt you have. Business debts break down into two main categories: secured and unsecured. Secured debt is backed by collateral, something of value like a building or equipment, that the lender could seize if you don't repay what you owe.

Unsecured debt isn't backed by collateral, only by a promise from you. For example, credit card debt.

It's typically easier to settle unsecured debt because creditors know there's a greater risk of getting nothing if you fall behind on your payments and file for bankruptcy. Settling a debt means reaching an agreement with a creditor where you pay a portion of what you owe and the creditor cancels the remaining balance.

Some common types of debt you could settle include:

• Business credit card debt

• Merchant cash advances

• Business lines of credit

• Trade credit/vendor debt

For secured debts, the lender would typically sell the collateral to recover what they are owed. If the collateral doesn’t sell for enough to satisfy the debt, you could then negotiate any remaining balance. If your debt doesn't fit neatly into one of the categories above, other strategies are still available to you. And if you do have one of the debt types above, settlement may not be your only, or even your best, option.

11 Business Debt Relief Options for Your Company

Here's a closer look at 11 options that could help you tackle your business debt.

1. Business debt settlement

Business debt settlement is a negotiated agreement with your creditors to accept a smaller amount as full payment. It could be a strategy worth considering for unsecured debts. 

2. Debt consolidation loans

Debt consolidation loans are a way to streamline your payments by replacing multiple old debts with one new loan, preferably at a lower interest rate than what you pay now. Consolidating could lower your monthly payment. It's generally only an option if you have good credit.

3. SBA debt relief programs

If you’re struggling with an SBA loan, you might be eligible for a loan modification or restructuring. For COVID-era EIDL borrowers, the SBA offers a reduced payment for six months. Interest continues to accrue. Participants will face a balloon payment at the end of the loan term to cover the shortfall in payments; the loan term is not extended. 

Payment deferral options for 7(a) and 504 loans are available on a case-by-case basis. There is no standard hardship program you can apply for online at this time.

Check with your SBA lender to find out your options.

4. Invoice factoring

Invoice factoring is a financing method where you sell your unpaid invoices at a discount to a third party for some quick cash. This means getting less money than if you'd waited for the buyer to pay the invoice. It could be a good fit if you need cash in a hurry and don't want to borrow.

5. Sell assets

You could free up cash to cover your existing debts by selling some of your business assets, such as old equipment, or by downsizing your workspace. How much you'll get varies depending on what you sell, and you'll give it up permanently.

6. Negotiate payment plans directly

Many creditors respond positively if you reach out to them directly before you begin to fall behind on your payments and explain your situation. You may be able to negotiate a payment plan or a change to the terms of your loan, like a lower interest rate. Not all creditors allow this.

7. Business debt management plans (DMPs)

If you’re a small or solo business, you could look into a debt management plan (DMP) with a nonprofit credit counseling agency, which pays your creditors from a single monthly payment you make. You might be able to do a DMP for small business debt, especially if you personally guaranteed it, which is common for gig workers and solopreneurs.

8. Chapter 11 bankruptcy

Chapter 11 bankruptcy restructures your debt and lets you keep your business running under a court-approved plan. You usually have to pay your creditors back over time, and you may still have to sell some of your assets as part of this plan. It could be worth considering if you hope to get rid of your debts without closing your company.

9. Chapter 7 bankruptcy

Chapter 7 bankruptcy could let you walk away from eligible debts without further payments. Not everyone is eligible, and income limitations could rule it out. You may have to close your business and sell your assets to repay as much of your debt as you can. Your business structure plays a big part in whether you'll be able to keep your business open.

10. Merchant cash advance restructuring

Merchant cash advance restructuring is a process of negotiating the terms of your merchant cash advance to make them more affordable. This might mean asking for a lower monthly payment or a lower interest rate. Not all creditors permit this, and you could end up paying significantly more in interest overall if you do.

11. Free up cash by dealing with personal debts

You could free up cash for harder-to-settle business debts by using debt settlement or another strategy to reduce your personal debts. You could negotiate debts on your own or work with a company like Freedom Debt Relief that will do the heavy lifting for you for a fee.

Debt settlement could negatively impact your credit.

How Business Debt Settlement Works: The Freedom Debt Relief Process

The business debt settlement process is similar to the personal debt settlement process. Working with Freedom Debt Relief typically follows four steps:

Step 1: Free debt evaluation. A Debt Consultant reviews your debts and helps identify good candidates for settlement.

Step 2: Dedicated account. If you enroll, you make monthly deposits into a dedicated account that you own and control, separate from your regular checking account. Most people stop paying creditors during this process, which usually hurts credit standing. It also helps you save toward an offer faster and gives you more negotiating power. Many creditors won't consider a settlement offer while you're still current on payments.

Step 3: Negotiation. Once you've saved enough, Freedom Debt Relief negotiates with your creditors on your behalf, drawing on more than 20 years of experience and relationships built through negotiating over $10 billion in debt.

Step 4: Settlement. Freedom Debt Relief doesn't collect fees until it has negotiated a debt, you've agreed to the settlement, and at least one payment has gone to your creditor.

Some creditors, like the Small Business Administration, are rarely willing to settle debts, while credit card companies may be more open. Each company has its own rules about how much of your outstanding balance will lead to a settlement, and which financial hardships they'll consider.

Debt relief could take a couple of years, depending on who and how much you owe. It's possible to settle your first debt in a matter of months.

That's what one Freedom Debt Relief client experienced. Karen took on debt to start her own online business. “They've settled all but one account and my credit is getting better slowly but surely,” she said in a TrustPilot review.

Individual results are not typical and will vary.

Can Creditors Sue During Business Debt Settlement?

Yes, a creditor could file a lawsuit to collect a business debt, even while you're saving toward a settlement offer. Pausing payments doesn't prevent a creditor from pursuing legal action, and older or larger unsecured debts carry a higher risk of a collection lawsuit.

If your business is sued, the law generally still allows room to negotiate, and a settlement is often still possible even after a creditor files a claim. Personal guarantees raise the stakes: if you personally guaranteed a business debt, a lawsuit could affect your personal assets as well as your business assets.

A business debt attorney could help you understand your rights if a creditor sues, including your state's rules for responding and protecting your assets. This is a legal matter, so it's best to talk with a licensed attorney about your specific situation.

Business Bankruptcy Alternatives

Business debt settlement is often a better alternative to bankruptcy because it's private and it doesn't require you to close your business. Unlike bankruptcies, settlements are private records.

Bankruptcy may be right for you if settlement isn't an option for your debts. Two common strategies for businesses are Chapter 7 and Chapter 11. Chapter 7 bankruptcy enables you to walk away from all your eligible debts. Income limits apply, and you may also have to close your business. Chapter 11 doesn't require you to shut down your company. You'll still have to repay your debts under a court-ordered plan.

People just like you are seeking debt relief in Los Angeles, CA and across the country. The first step is the most important one—explore your options.

How to Find a Reputable Debt Relief Company

If you lean more toward debt settlement as a solution and you don't want to go it alone, it helps to know what to check for in a debt negotiation company. 

Here are some dos and don'ts to help you choose the best company to work with. 

Do:

• Choose a company that offers a free initial consultation and answers your questions about fees and services clearly.

• Read reviews of debt settlement companies to find out what current and past customers have to say.

• Choose a company that employs certified debt experts and provides proof of their credentials.

Don't:

• Allow a company to pressure you into working with them. That's a big red flag they may not be legitimate.

• Pay upfront debt settlement fees if you haven't received any services yet.

Always trust your gut. If a company refuses to answer questions, won't share information about fees, or just feels off in any way, listen to your instincts. Those red flags could all be signs of a debt relief scam.

Qualifying for Business Debt Settlement

Secured debt, such as a mortgage or company car loan, typically doesn’t qualify for debt settlement. Neither does federal student loan debt or recent tax debt. However, you could settle most of your other business debts if you're eligible. 

Make sure it makes sense to settle your debt. Some factors to consider are:

• Debt amount. Debt settlement typically makes sense if you have $7,500 or more in debt. Other strategies might work better for smaller debts.

• Type of business. Whether a business is operating as a sole proprietorship, LLC, or corporation will affect whether your personal finances could be at risk due to unpaid business debts.

• Personal guarantees. If you've personally guaranteed business loans or pledged collateral, this could affect the likelihood of successfully negotiating a settlement.

• Cash flow requirements. Your business cash flow affects how quickly you'll be able to save money for a settlement offer.

• Age of the debt. Generally, older debts that have already been sent to collections agencies are easier to settle than debts still owned by the original creditor.

• Willingness to pause payments during negotiations. Pausing payments could hurt your credit and expose you to lawsuits. It could also make creditors more open to negotiations.

Ultimately, the best way to find out whether you're eligible for a debt settlement program is by requesting a free debt evaluation from a debt settlement company.

Special Considerations for SBA Loans and Tax Debt

A typical lender issues your SBA loan, and the SBA backs it. If you fail to pay back your loan, the SBA pays your lender and then comes after you for repayment. The federal government could garnish your wages, tax refunds, federal benefits, and bank accounts without a court order.

You still have options. You may be able to make an Offer in Compromise (OIC) with either the SBA or the IRS, similar to a settlement offer where you propose how much you could pay and the government decides whether to approve it. You'll need to provide detailed documentation of your finances, and even then, approval isn't guaranteed. If you owe business tax debt, an IRS installment plan lets you repay your debts over time, which could help you avoid wage garnishment or asset seizure.

How to Approach Debt Relief Step by Step

Debt relief is sometimes more of a process than a quick solution. Here's how to get a better handle on your business debt situation.

• Assess your debt. List your secured and unsecured business debts, noting how much you owe, the interest rate, and your monthly payment.

• Review your cash flow. Analyze your income and expenses to compare how much you take in versus how much you spend, including debt payments.

• Analyze your budget. Once you know what your business spends, review your budget for expenses you could reduce or cut. Extra savings from a leaner budget could go toward your debts.

• Explore government debt relief options. Consider whether an SBA 7(a) loan to consolidate your debts makes sense, and check for state and local financial assistance programs.

• Consider private debt relief. Debt settlement could help reduce what you owe if you primarily have credit card debt or other unsecured debt. Weigh the pros and cons to determine whether it fits your situation.

• Talk to an expert. A financial advisor could review your expenses, cash flow, and debt to offer advice tailored to your needs.

Benefits and Considerations of Business Debt Relief

Debt relief could affect your business in different ways, in the near term and over time.

Benefits

• Lift the mental weight of financial stress

• Help you recognize and move past debt shame

• Improve your business' cash flow and budget

• Help you feel more confident about your financial situation going forward

Considerations

• If you settle debts, your personal credit score is likely to suffer. Your business credit score may also dip.

• When your credit takes a hit, new loans or lines of credit for your business could be harder to find, and more expensive, until your score improves.

• Credit-score effects from debt settlement may improve as you rebuild your credit history. Results vary, and recovery may take longer if you miss payments or have accounts in collections.

• In the long term, your business may be more stable financially without excess debt weighing it down.

Don't Deal With Small Business Debt Alone

If you've turned to credit cards and other forms of unsecured debt to keep your business afloat, you're not alone. Thousands of business owners have gone into debt to help their companies succeed. That's why there are debt relief programs for business owners.

If you're having difficulty keeping up with your payments, it may be time to get help. A debt relief company like Freedom Debt Relief, backed by experienced Certified Debt Consultants, could offer debt relief solutions you need to get rid of your business debt.