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:
  1. You can repay your debt within five years.
  2. Your total debt is less than 42 percent of your gross income.
Doing it yourself doesn’t mean doing it all yourself; you can still work with a credit counseling agency for a free initial consultation and basic budgeting help. Just make sure you’re working with an agency that’s accredited by the Financial Counseling Association of America or the National Foundation for Credit Counseling. Also, you may find that a debt consolidation loan helps you lower the payments on your DIY plan. New call-to-action

5. Talk to a bankruptcy attorney

According to NerdWallet, you should consider bankruptcy when either of these two scenarios is true:
  1. You have no hope of repaying unsecured debt in less than five years even with drastic spending cuts.
  2. Your total debt is equal to or greater than half of your gross annual income.
Neither scenario means that you definitely need to declare bankruptcy but you should talk to a bankruptcy attorney. Usually, you can find an attorney who will provide a free consultation. During that consultation, the attorney can review your situation and help you understand your options.

Be Wary of Debt Relief Options

Debt relief is big business in the United States and scams are common. In some cases debt relief can help. In other situations, debt relief just digs you into a deeper hole. Whether you’re considering a consolidation loan, DMP, or debt settlement services, confirm how much of your monthly payments are going towards debt and fees. In short, make sure the debt relief option you choose is actually saving you money.

Conclusion: Don’t Put off—or Add to—Your Debt Problems

When it comes to credit card debt and other debt types, there’s one universal rule: the longer you avoid confronting it, the worse it gets. Therefore, whatever you do, you should take action. Start by talking to a trusted friend, colleague, or family member who has good money habits. Reach out to credit counseling agencies or talk to a bankruptcy attorney. In most cases, you can at least get yourself pointed in the right direction through free consultations. Also, until you’ve gotten your debt under control, we recommend avoiding any financing that doesn’t lower your total debt costs. Finally, if you’d like to learn more about the debt relief options listed above, you can read these posts