Small Business Debt Relief Guide

If your small business is struggling to meet its obligations, you might be looking for some debt relief advice. You’re not alone: Each year, thousands of American small business owners find themselves in desperate financial straits.

Those who survive are able to do so by becoming slimmer and more frugal. In most cases, they also utilize one or more methods of small business debt relief.

Before you throw in the towel and make the final Chapter 7 bankruptcy declaration that will put your organization out of business, consider some other options. For starters, many lenders offer large debt consolidation loans to their struggling small business clients.

Small Business Debt Consolidation Loans

If it meets certain criteria, your small business may qualify for a debt consolidation loan from a nonprofit lender. These types of loans generally carry lower rates of interest than their privately-issued counterparts. In turn, this could make the payments on these loans easier to afford.

If you can’t find a nonprofit debt consolidation loan or don’t qualify for one, you can seek a loan on the private market. By putting some of your business’s assets up as collateral for your loan, you may be able to secure a lower rate on it. However, this is a major risk: If your loan falls into delinquency, you could lose those assets.

Debt consolidation loans pay off your original unsecured creditors and roll your obligations into a single monthly payment. This can be a major boon for a busy business owner who lacks the time or inclination to manage multiple monthly debt payments.

Downside To A Business Debt Consolidation Loan

However, debt consolidation loans can take five or more years to pay down in full. In the meantime, these credit facilities will continue to accrue interest at above-prime rates. This continual accrual of interest may limit the amount that you’ll save using this method of debt relief. Without additional revenue, you might have no choice but to consider more drastic debt relief options for your business.

Small Business Bankruptcy For Debt Relief

If you’ve decided that bankruptcy is the only way out of your financial pickle, you’re not alone. Unfortunately, thousands of small business owners are forced to declare bankruptcy every year. Since the recent housing bust and subsequent financial crisis, these numbers have been elevated. Although there are plenty of reasons for you to continue fighting to avoid a potentially costly bankruptcy reorganization, there’s also no shame in pulling the trigger.

There are actually two common forms of bankruptcy reorganization that are available to small business owners: “Chapter 11” and “Chapter 13.” Also known as “restructuring,” these two types of bankruptcy enable small business owners to renegotiate the terms of some of their credit cards and unsecured loans.

Although both forms can have serious credit-score effects, these methods of debt reorganization are designed to help business owners avoid a worst-case declaration of Chapter 7 bankruptcy.

In most cases, you’ll need to declare Chapter 11 bankruptcy. Chapter 13 declarations are generally reserved for individual debtors who carry large amounts of unsecured debt.

Then again, Chapter 13 filings may also be available to sole proprietors. If you’re the only employee of your small business, you have every legal right to declare bankruptcy under Chapter 13 of the U.S. Bankruptcy Code. However, this type of bankruptcy comes with a strict debt limit: You can’t file for Chapter 13 bankruptcy with more than about $1.4 million in total debt. If you have more than $360,000 in unsecured debts or $1.08 million in secured debts, you must file bankruptcy under Chapter 11.

Both of these processes achieve similar results. When you declare bankruptcy, the judge who presides over your case will work with you and your creditors to lay out a new plan for the repayment of your debts. You’ll be responsible for initially proposing this plan. Once it’s entered into the record, the negotiation process can begin.

If your business is relatively large, this plan may involve selling off some of its non-core assets in order to satisfy your secured debts. For instance, you may be asked to sell some extra equipment that you don’t use or find buyers for some of the storefront locations that your company owns. In all likelihood, your business will exit the bankruptcy reorganization process as a smaller, leaner organization.

Your bankruptcy judge might also work out new repayment plans with your unsecured creditors. When you file for Chapter 11 or Chapter 13 bankruptcy, it’s unlikely that any of your unsecured debts will be forgiven outright. Under the judge’s order, some of your creditors may agree to reduce the balances on your outstanding credit facilities. Others might agree to lengthen your repayment term.

These moves might take some of the pressure off of your business’s finances and give you a chance to boost sales or find other streams of revenue. Every year, restructuring helps thousands of American small businesses keep their doors open.

Downsides To Filing Bankruptcy For Small Business Debt Relief

However, many small business owners who successfully emerge from restructuring find themselves back in serious financial trouble within a few years. This is because the bankruptcy process is highly detrimental to its participants’ credit scores. Although your personal credit profile might be protected by your organization’s status as a limited-liability corporation or other “shielded” business entity, your business’s credit profile will be heavily damaged by your participation in a restructuring plan.

Once your firm emerges from restructuring, you’ll find that the cost of taking on new loans has skyrocketed. You’ll have to pay higher rates of interest and adhere to strict borrowing limits. Worse, some of your loan applications might be denied outright. It’s hard to expand or even maintain a business under such circumstances.

A Viable Alternative For Small Business Owners Looking To Get Debt Relief

Although there are some important distinctions between consumer debt and business debt, some of your small business’s obligations may qualify for relief through the debt settlement process. Eligible debts might include personal credit facilities that have been used as investment vehicles for your business as well as certain unsecured business loans or lines of credit.

In fact, virtually all unsecured debts are eligible for debt settlement. Although this process resembles restructuring, it may have a gentler impact on your credit score. Like restructuring plans, debt settlement plans involve negotiating with unsecured creditors to reduce debt balances.

Although no case is typical, it may be possible to reduce your unsecured debts by a significant amount using this method. Most debt settlement programs take less time to work through than debt consolidation lending plans. In fact, some business owners have used this method to settle their debts in just 24 months.

As a small business owner, you have plenty of debt relief options at your disposal. Debt consolidation loans, debt restructuring, bankruptcy and debt settlement are just a few of these. Before taking any steps that might affect the long-term viability of your business or your own personal finances, be sure to consider all of the options available to you.