Business Debt Settlement: Complete Guide for Small Business Owners [2025]

Taking on debt is a normal part of running a business, and often it's 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. But understanding all your options is key to making the right call.

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 debt backed by collateral—something of value like a building or a piece of equipment—the lender can seize if you don't pay back what you owe. This includes mortgages and equipment loans. 

Unsecured debt isn't backed by collateral, only by a promise from you. This might be an SBA loan or credit card debt.

It's easier to settle unsecured debt because creditors know there's a greater risk of them getting nothing if you fall behind on your payments and declare bankruptcy. Settling your debts means reaching an agreement with your creditor where you pay a portion of your debt and they forgive the rest.

Some common types of debt you can 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 that happens, you could negotiate any remaining balance.

If the type of debt you have doesn't fall into one of these categories, don't worry. Other strategies are 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. 

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11 Business Debt Relief Options Ranked by Effectiveness

Here's a closer look at 11 of the most effective ways to 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's a great potential strategy for unsecured debts. 

2. Debt consolidation loans

Debt consolidation loans let you streamline your payments by replacing multiple old loans with one new loan. You may be able to reduce your monthly payment or reduce the overall cost of your debt if you can get a lower interest rate. This could work well if you have multiple debts you're trying to get under control, but it's generally only an option if you have good credit.

3. SBA debt relief programs

The Small Business Administration (SBA) offered debt relief programs during the COVID-19 pandemic. If you took out one of these loans and are now struggling, you may qualify for some financial assistance. Check with your SBA lender to find out if this is a possibility for you.

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. But it could be a good fit if you need cash in a hurry and don't want to borrow.

5. Sell assets

Selling some of your business assets could free up cash to cover your existing debts. This could include things like getting rid of old business equipment or even downsizing your workspace. How much you'll get for this varies depending on what you're selling, and you'll give up what you sell.

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)

You typically enter into a debt management plan (DMP) with a nonprofit credit counseling agency. You might be able to do a DMP for small business debt, especially if you personally guaranteed the debt, which is common for gig workers and solopreneurs. You pay money to a credit counseling agency and they pay your creditors. It can be a good way to sort out your finances without hurting your credit, but some people find the minimum payments too high.

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, but not everyone qualifies. Income limitations could rule it out. You may have to close your business and sell your assets to pay off as much of your debt as you can. Your business structure—sole proprietorship, partnership, corporation, or LLC—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 wind up paying a lot more in interest overall if you do this.

11. Free up cash by dealing with personal debts

Using debt settlement or another strategy to get rid of some of your personal debts may give you access to more cash you could put toward your business debts that may be harder to settle. 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.

How Business Debt Settlement Works: The Freedom Debt Relief Advantage

The business debt settlement process is similar to the personal debt settlement process. Working with Freedom Debt Relief begins with a free debt evaluation with one of our Debt Consultants, who will help you identify which of your debts might be good candidates for debt settlement.

If you enroll, you'll make a monthly payment into a dedicated account that you own and control, but it’s separate from your regular checking account. Most people choose to stop paying creditors during this process. Stopping payments will hurt your credit standing, but it helps you save money for offers more quickly and gives you greater negotiating power. Many creditors won't entertain a settlement offer if you're still current on payments. 

Once you've saved up enough money, Freedom Debt Relief negotiates with your creditors on your behalf. With over 20 years of experience negotiating over $10 billion in debt, the company has relationships with many creditors and has a good understanding of what kinds of offers they may accept. Freedom Debt Relief doesn't collect any fees until it's successfully negotiated a debt, you've agreed to the settlement, and at least one payment has been sent to your creditor.

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

Debt relief could take a couple of years, depending on who and how much you owe. But it's possible to settle your first debt in a matter of months. As each debt comes off your plate, you can begin to rebuild your finances and breathe a little easier.

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. She rated Freedom Debt Relief five stars.“I want my 770 score back and I believe they will help me get there!"

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. You'll have to decide which type of bankruptcy makes the most sense. Two of the most 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 to be eligible for this type of bankruptcy. You may also have to close your business to go this route. Chapter 11 doesn't require you to shut down your company but you'll still have to pay your debts, which you'll restructure under a court-ordered plan. An experienced business bankruptcy lawyer is the best person to guide you toward your best path.

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 look for in a debt negotiation company. 

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

Do…

• Look for a company that offers a free initial consultation to discuss your situation and possible debt solutions. 

• Ask questions about the fees and the services you get in return. 

• 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 can provide 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. 

• Buy into claims that seem too good to be true.

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. 

Learn more: 5 Strategies to Help Manage Small Business Debt

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.

• Industry-specific considerations. Certain industries may have unique considerations that affect the likelihood of successfully settling a debt.

• 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. Taking this step could hurt your credit, but it could also make creditors more open to negotiations.

Ultimately, the best way to find out whether you qualify 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, but it's backed by the SBA. If you fail to pay back your loan, the SBA pays your lender and then comes after you for repayment. The federal government can garnish your wages, tax refunds, federal benefits, and bank accounts without a court order. This can make it more challenging to deal with these debts.

You're not without options, though. The SBA offered some debt relief options during the COVID-19 pandemic. If you took out a loan during that time, you may still qualify for some of these programs.

You may also be able to make an Offer in Compromise (OIC) with either the SBA or the IRS. This is similar to a settlement offer, where you say how much you can pay and the government decides whether to approve it. If it does, you're off the hook for the rest. But you'll need to provide detailed documentation of your finances and even then, it's not a guarantee.

If you owe business tax debt, you may be able to set up an installment plan with the IRS that lets you pay back your debts over time. This 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. Make a list of all your secured and unsecured business debts. Note how much you owe, the interest rate, and your monthly payment. 

• Look at your cash flow. Cash flow is how money moves in and out of your business. Analyze your income and expenses to figure out how much you take in versus how much you spend, including payments to debt. 

• Analyze your budget. Once you know what your business spends, look at your budget again so you can revise it. Are there expenses you could reduce or even cut out? The more you can trim, the more money you can use to pay back your debts.

• Explore government debt relief options. If you have loans or credit cards, consider whether it makes sense to use an SBA 7(a) loan to consolidate them. Also check out financial assistance for small businesses at the state and local level.

• Consider private debt relief. Debt settlement can offer a pathway out of debt if you primarily owe money on credit cards or have other unsecured debts. Look at the pros and cons of debt settlement to determine if it might be right for you. 

• Talk to an expert. Sometimes it helps to have a second set of eyes reviewing your business' finances and debt. A financial advisor can review your expenses, cash flow, and debt to offer advice tailored to your needs. 

Learn more: How to Ask Creditors for Loan and Credit Card Forbearance

Impact of Debt Relief on Your Business

Debt relief can have short- and long-term impacts on your business. In the near term, debt relief could:

• Lift the mental weight of financial stress 

• Help you recognize and overcome debt shame

• Improve your business' cash flow and budget

• Allow you to feel more confident about your financial situation going forward

There may be some downsides. If you settle debts, expect your personal credit score to suffer. Your business credit score may also dip. When credit takes a hit, it may be harder to get new loans or lines of credit for your business for a while. If you qualify for loans, they’ll probably be expensive until you have a higher credit score.

Negative impacts from debt settlement tend to fade over time, and the damage isn’t permanent. In the long term, your business may be healthier and more stable financially if you don't have excessive debt weighing you 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 could offer debt relief solutions you need to get rid of your business debt faster. 

With help from experienced and Certified Debt Consultants, you could put your debt stress in the past and move on to help your business reach new levels of success in the future.