If your small business is struggling to meet its obligations, you might be tempted by solicitations offering to settle your debts for pennies on the dollar. You’re not alone. Each year, thousands of small business owners find themselves in desperate financial situations. There are legitimate methods of debt relief available to help your small business survive. However, there are also debt relief scammers who leave small businesses in worse shape, while also scarring a reputable lending industry.
In this post, we’ll talk about ways small businesses can reduce their financial burdens, evaluate debt relief options, and spot the deals that are just too good to be true.
The first step any small business should take when struggling is to improve operations. After taking steps to improve cash flow, many small businesses can also trim thousands of dollars off the bottom line each month simply by taking a closer look at their expenses.
Small businesses should review their expenses at minimum on a quarterly basis. Print an accounts payable list to see who you’ve paid and for what. Is each payment vital to sustaining your business? Don’t forget to review your credit card statements as well. Many times, small businesses sign up for recurring services even though they don’t necessarily need or use them. Cut the fat and only pay for the necessities. In addition, since payroll is almost always the biggest expense for a small business, you should evaluate your staffing needs. Do you really need 3 waiters during the slowest part of the day?
It’s simple, when you save money, your business benefits. By making small changes to keep expenses to a minimum, you’ll protect your bottom line and avoid spending more than you have. Go paperless. Use free apps. Use social media to advertise for less. Keep your office at home.
Accepting multiple advances or loans to fund your daily operations is called stacking. Small businesses often get lured into stacking as a quick fix solution only to find themselves drowning even more in months to come. Read Stacking: Understanding Risks and Alternatives to learn more.
Debt consolidation should not be confused with debt settlement or debt relief, which involves paying your creditors a lump sum payment which is lower than the total amount you actually owe. While this sounds great, there are a number of risks to consider.
Unfortunately, small business debt settlement scams have been on the rise.1-3 With promises to reduce a small business’s short-term debt by as much as 75% in 48 hours, many debt-strapped small business owner’s sign up before realizing they’ve been scammed. Scammers make no efforts to negotiate with lenders or make any payments, and small businesses end up in default on loans they probably could have renegotiated.
Commenting on the “fraudulent, abusive, and deceptive practices of debt settlement companies,” the Ohio State Law Journal notes studies finding that less than 10% of clients of these companies receive any of the services for which they paid, instead finding themselves saddled with “trashed credit,” “lawsuits,” and even more debt than before.3
In fact, this has become such a problem that the FTC has chimed in requiring minimum standards of business practice, all of which would already be abided by companies who are conducting business the right way.
Small business owners need to be wary of doing business with any company that:
If you’ve done everything you can to reduce your financial burdens and improve operations, but are still struggling to make ends meet, it may be time to evaluate debt relief options. As tempting as it may be to accept an offer to reduce your debt by 70%, those deals are not realistic and not designed with your long-term survival at heart. Here are some legitimate debt relief options to consider:
If you’re having trouble making debt payments, your first call should be to the company you have the debt with in the first place since they have a real incentive to work with you on your ability to honor your obligations. Explain your situation and see if they are able to help. In many cases, they will do everything they can to structure a deal that ensures you stay afloat so they can recoup their loan. Be truthful and honest so everyone is working with the same facts. Imagine that…a symbiotic relationship.
Debt consolidation loans pay off your original unsecured creditors and roll your obligations into a single monthly payment, ideally at a lower interest rate. However, it is important to keep in mind that a lower interest rate is usually offset by longer payback periods and/or an incorporated factor rate. Debt consolidation is a temporary solution to a permanent problem…your business is spending more than it is making, so make sure you’re tackling that problem first. Nothing’s for free, but the lower payments of a consolidation loan may help your small business get back on track. There are different types of debt consolidation loans to consider.
If you qualify, some lenders may be willing to offer you a debt consolidation loan without the need for business or personal collateral. Obviously, this limits your risk, but increases the risk for the lender, so your interest rate or factor rate may be higher.
By putting some of your business’s assets up as collateral, you may be able to secure a lower interest rate. However, it is important to keep in mind that if you default, you could lose your assets.
If your small business meets certain criteria, it may qualify for a debt consolidation loan from a non-profit lender. Many non-profit lenders focus on smaller loans of under $50,000. Because these lenders are typically mission-driven and target businesses with the potential to help the community, borrowers are often offered mentorships to help them maximize the value of the financing to their businesses. A few options:
As a last resort, you could consider filing bankruptcy. There are two common forms of bankruptcy reorganization that are available to small business owners: Chapter 11 and Chapter 13. These are known as restructuring and enable small business owners to renegotiate the terms of some of their credit cards and unsecured loans. While both of these forms are designed to help avoid the worst-case declaration of Chapter 7 bankruptcy, they can have serious credit-score effects that will make long-term survival nearly impossible. Again, a bankruptcy option should be a last resort, but if you are there, many bankruptcy attorneys will speak to you initially free of charge to provide you with your options under the law.
Debt consolidation can be smart money management if tackled appropriately. Connecting directly with your creditors to see if they are willing to help, and evaluating additional options to help lighten your financial burdens, can go a long way to helping your business survive. Watching out for deals that can be too good to be true is also part of your job. Manage your debt wisely from the beginning so you can keep focused on growing your business instead of trying to keep it afloat.
About Breakout Capital
Breakout Capital is committed to responsible lending. We believe it is better for you to keep your business and grow it responsibly than set it up to fail with insurmountable debt. Please contact us today if you’d like to partner with us.