Debt Relief for Business Owners

When you run a small business, you quickly learn that it takes capital to grow. Some business owners bootstrap; others borrow. In fact, 24% of business owners use credit cards to fund their entrepreneurial dreams. 

There's nothing wrong with that, but there comes a point when you might want to run your business debt-free. Debt relief programs can help you improve your business cash flow and move from the red to the black. 

Let's look at how debt relief for small businesses works. 

Government debt relief programs

Federal and state programs help small business owners like you meet different needs. Here are some of your options. 

SBA debt relief

The Small Business Administration (SBA) oversees several loan programs aimed at small business owners. You might qualify for SBA debt relief with:

• 7(a) loans. The 7(a) loan program offers eligible businesses up to $5 million in funding. You could use that money to refinance current business debt so your payments are more manageable. SBA loans typically have longer repayment terms and lower rates than business loans from banks or online lenders. 

• Economic Injury Disaster Loans. The EIDL program lends to businesses that have been impacted by a disaster and can't cover expenses. These loans are intended to help with operating expenses until you recover. If necessary, you could also get a separate business physical disaster loan to repair your business property. The combined limit for both is $2 million. 

Each loan type has its own requirements. For 7(a) loans, you must operate a for-profit business in the U.S. and meet SBA size requirements. For EIDL loans, you have to have been directly impacted by a disaster that prevents you from covering expenses. 

State and local programs

Your state and local governments may offer debt relief programs for small businesses. The options may include:

• Low-interest loans

• Grants

• Financial assistance

You can find what's available in your area by searching for "small business grants in [your state].” You could also get in touch with your local chamber of commerce or secretary of state’s office. 

Before you apply for debt relief, consider what you'll need to qualify, and how much aid you could receive. Also, weigh the potential financial impact on your business. 

A grant, for instance, can provide funds that you won't have to pay back, while a loan is a new debt. You may have to consider whether a temporary fix in the form of a loan is sustainable for your long-term business budget. 

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Private debt relief programs for business owners

Private debt relief is offered by companies, not government agencies. Some of the avenues you might pursue for private debt relief include debt consolidation and debt settlement. 

Debt consolidation

Debt consolidation doesn't reduce debt, it just makes your debt easier to manage. When you consolidate debt, you take out a loan (often, a personal loan) and use the money to pay off other debts. 

For example, if you have five credit cards with a combined balance of $50,000, you might get a $50,000 personal loan to pay them off. You then have just one payment to make to the loan each month. 

Debt settlement

Debt settlement is a process in which you negotiate with your creditors, asking them to accept less than what's owed but consider it payment in full. Creditors may agree to settle 25% to 50% of your debt or more, and the rest is forgiven. 

This is a completely legal way to resolve debt. You might consider debt settlement if you:

• Primarily owe unsecured debts, such as credit cards

• Have a significant amount of unsecured debt

• Would like to clear your debt within 24 to 48 months

Why do creditors agree to settle debts? Most often, it's so they can walk away with some amount of money, and the debt isn't a total loss. 

You could attempt to negotiate with creditors directly. If you aren’t comfortable with negotiating or you want professional help for any other reason, you could hire a professional debt settlement company. Here's how it works:

• You tell the debt settlement company which debts you’d like to negotiate. 

• Each month, you deposit a set amount of money into a secure account that you control. The amount should be affordable, and it might be less than the total of the minimum payments you’re making now.

• The debt settlement company negotiates with your creditors.

• When an agreement is reached, you authorize the debt settlement company to use funds from your secure account to pay your creditor. The debt settlement company’s fees will be paid from the same account.

Debt settlement can help you get rid of your debt for less than you owe. You pay a fee to work with a debt settlement company, but it may be worth it to avoid the hassle of haggling with creditors yourself. Also, since professional debt settlement companies have relationships with many creditors, they might be able to negotiate a better deal than you could get on your own.

If you stop making payments to your creditors during the debt settlement process, there will be a negative impact on your personal credit standing. The damage doesn’t have to be permanent. Getting back on stable financial footing by clearing your debts could put in a better position to handle your obligations in the future. Paying your bills on time and keeping your debt low are two of the best things you can do to rebuild and maintain a good credit score. 

How to find a reputable debt settlement 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 see 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 that they may not be legitimate. 

• Pay upfront fees if you haven’t received any services yet. 

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

Most importantly, do 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 could all be signs of a debt relief scam. 

Learn More: 5 Strategies to Help Manage Small Business Debt

How do business owners qualify for debt settlement?

The best way to see if you qualify for a debt settlement program is by requesting a free debt evaluation from a debt settlement company. 

Secured debt, such as a mortgage or company car loan, doesn’t qualify for debt settlement. Neither do federal student loan debts or tax debts. 

Here’s how to tell if you could qualify for debt settlement:

• You have $7,500 or more in unsecured debt, like credit card, personal loan, or other debt not tied to collateral.

• If you’re enrolling debt from your business, you must be the sole proprietor of the business, and the debt must be in your name only.

• You got into debt because of a financial hardship, including the insolvency of your business, loss of a job, or taking on personal debt to keep your business afloat.

• You are struggling to make payments on your debt, or you’ve already fallen behind on payments.

How to approach debt relief step-by-step

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

1. Assess your debt. Make a list of all your business debts, secured and unsecured. For unsecured debts, note how much you owe, the interest rate, and your monthly payment. 

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

3. Look at your budget. Now that you know what your business spends, look at your budget again in order to revise. Are there expenses you could reduce or even cut out? The more fat you can trim, the more money you can add back to your cash flow. 

4. 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. You can also check out financial assistance for small businesses at state and local levels.

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

6. Talk to an expert. Sometimes it helps to have a second set of eyes review your business finances and debt. A financial advisor or debt relief consultant can look at 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 can:

• 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

Are there downsides? If you settle debts, you’re likely to see some negative impacts on your personal credit score. Your business credit score may also suffer. 

When credit takes a hit, it may be more difficult to get new loans or lines of credit for your business. If you qualify for loans, you may pay higher interest rates. 

However, negative impacts from debt settlement tend to fade over time, and the damage isn’t permanent. And 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 their business afloat, you’re not alone. Thousands of business owners have gotten into debt to help their businesses succeed. That’s why there are debt relief programs for business owners.

If you’re in so much debt that you are having difficulty keeping up with your payments, it may be time to get debt help. A debt relief company like Freedom Debt Relief could offer the solution you need to get out of debt faster. With help from experienced Certified Debt Consultants, you could put your debt stress in the past, and move on to your next financial goal.