July 13, 2021
Business Debt Relief: How to Acquire Financing
Unburying yourself may feel impossible with all your free cash going to service debt rather than grow your business.
Fortunately, you have options, as debt relief financing can help you make your business debt more manageable. Also, other debt relief options, such as debt management plans and debt settlement can help you get out of debt.
Each alternative has its benefits and drawbacks and their effectiveness depends on the types of debt you've acquired. Therefore, to help you determine the best funding option for your business, this post will review popular debt relief programs.
What are Your Business Debt Relief Options?
1. Take out a debt consolidation loan
Put simply, a debt consolidation loan is debt relief financing that allows you to combine several debts into one. Ideally, this type of business loan enables you to pay off high-interest debts and combine them into a single, low-interest loan. However, it’s not always possible to get a lower interest rate. This is because your debt consolidation loan interest rate depends on your credit report and ability to repay. If you have a poor credit history, while you may qualify for debt consolidation, it may not reduce your debt payments. That said, even if your payments remain the same, it can be helpful to consolidate your debts if it helps you stay organized. Just make sure you don’t take out a debt consolidation loan that causes you to make even larger payments.2. Hire a debt settlement company
Another popular, but risky debt relief option is to hire a debt settlement company. When you hire a company to settle your debt, you stop making any debt payments. Instead, you start putting money into a dedicated account managed by a third party. Once you’ve accumulated enough money, the debt settlement company starts negotiations with your creditors. The debt relief company’s goal is to convince your creditors to accept a lump sum payment and close your account. The idea is that your creditor should prefer to accept partial payment rather than pursue costly litigation. However, there’s no guarantee this will be approved, because its preferred that you pay your creditors in full. If they don’t accept the settlement offer, you’ll be liable for all the late fees, penalties, and accumulated interest from when you stopped making payments. Of course, if they do accept, you can be rid of your debt for a fraction of its value. Even then though, your credit score will be negatively impacted.3. Start a debt management plan
With a debt management plan (DMP), you work with a credit counseling agency to create a debt repayment plan. The agency typically starts by consulting with you to review your situation and explain your options. Then, assuming you decide a DMP is a good fit, your credit counselor negotiates with your creditors to create the repayment plan. From there, you make a monthly payment to the credit counseling agency and they disburse the money to your creditors. In some cases, if you agree to pay through a DMP, your creditors may agree to waive fees and/or lower your interest rates. However, it’s important to note that DMPs are for unsecured loans, such as credit cards. Any collateralized debt can’t be part of your DMP, and most DMPs take between three to five years to complete. During that time you usually won’t be able to use credit cards or get new lines of credit.4. Do it yourself
Debt relief options, including the ones listed above, come with risks and expenses. Even the non-profit counseling agencies that facilitate DMPs charge fees. Therefore, if you can manage your own debt, you should. How do you know if you can manage your business's debt independently? As a rule of thumb, a DIY plan might work if either of these is true:- You can repay your debt within five years.
- Your total debt is less than 42 percent of your gross income.
5. Talk to a bankruptcy attorney
According to NerdWallet, you should consider bankruptcy when either of these two scenarios is true:- You have no hope of repaying unsecured debt in less than five years even with drastic spending cuts.
- Your total debt is equal to or greater than half of your gross annual income.