Excessive business debt can be incurred for many different reasons including expansion, unexpected large expenses, or even poor management, and different causes sometimes require different courses of action. Commercial debt counseling (CDC), debt consolidation loans, and bankruptcy are three of the most common options for business debt relief.
Many managers and business owners hold off on seeking help longer than they should, because they fear loosing control of their finances or appearing week to the competition. However, unmanageable debt eventually will lead to intense pressure from debt collectors and potentially to lawsuits, so it is important to take action early.
Commercial Debt Counseling
Commercial debt counseling does for businesses what consumer credit counseling does for individuals – plus a great deal more. Company finances are so complex and varied, that it often takes a business finance expert to be able to sort through information to determine the primary causes of debt, and this is precisely what a commercial debt counselor does.
CDC combines business debt help with debt settlement, so counselors help both to discern problems and educate managers, and to take action to rectify the current situation. The counselor’s goal is to increase revenue by determining the problem areas that are increasing a business’s debt, and often by re-allocating funds to departments differently.
The counselor will suggest to managers how finances can be handled differently to improve the situation, perhaps through the incorporation of external investors or debt consolidation loans. This part of the process usually is completed within just a few weeks.
The counselor then negotiates with individual creditors to try to settle a company’s debts for a reasonable sum. It is not in creditors’ best interests for a debtor to file bankruptcy, so often they will agree to settle your debt for payment that is less than full balance.
Your counselor alternatively may negotiate the terms and interest rates of your loans, or may develop a realistic payment plan with creditors. As an added bonus, your counselor will become the point of contact for your creditors instead of you.
Debt Consolidation Loans
A business debt consolidation loan is a single loan that is taken out to pay off all other loans. Rather than having to manage payments to many different creditors each month, businesses only have to pay one creditor with a debt consolidation loan. In addition, businesses often can lower their interest rates by consolidating.
Obtaining a debt consolidation loan for a business is significantly more difficult than obtaining one for an individual. Because business debt consolidation loans likely will cover large amounts of debt, such disbursals are very risky for lenders.
Businesses are created for the sole purpose of creating revenue, so if revenue is not enough to cover costs, then lenders would like to know the reasons for this before they dispense money.
Some reasons are considered understandable, like if your company incurred a large expense for which you were not planning. Other reasons, however, such as poor management, may indicate a situation with which lenders will not want to be involved.
There are both secured and unsecured debt consolidation loans for businesses. Unsecured loans, or those that do not require any property to be put up as collateral, may be obtained only for small debts. These are very difficult to obtain, and always come with high interest rates.
Secured loans require that a valuable piece of property, such as a home, be attached to the agreement. In the event that your business fails to repay the loan, the property will be seized for payment. Consequently, these are easier to obtain and at better interest rates.
In the event that your business becomes truly unable to repay its debts, and if commercial debt counseling and debt consolidation loans have not been helpful to you, then you might consider filing business bankruptcy. Businesses may file for Chapter 7 or Chapter 11 bankruptcy.
Chapter 7 is liquidation bankruptcy for individuals and businesses. Filers’ assets are sold, and the money generated is used to pay some debts. In order for creditors to be eligible to receive any of this payment, they must file a claim. All unsecured debts that remain unpaid are discharged, while secured debts are granted the property owed to them.
Once a business has filed chapter 7, that business almost certainly ceases to exist.
Chapter 11 is reorganization bankruptcy for individuals and businesses, but it is utilized almost completely by businesses. It is the usual choice for large companies, as it relies on a restructuring of finances rather than liquidation, and filers retain control of their assets.
For the benefit of both the company and its creditors, business continues as usual, but under the discretion of the bankruptcy court. A creditors’ committee is established by a U.S. Trustee with which you must negotiate a plan for repayment. In order for the plan to be approved, the creditors must vote for agreement. It is possible, however, to obtain approval anyway by meeting certain criteria.
Chapter 11 is a very flexible form of bankruptcy that is attractive to business owners. However, because of its flexibility, it also tends to be expensive and many businesses find that they are unable to stay afloat after all.
When it comes to managing business debt, carefully consider your options and your financial future. Commercial debt counseling can be a great way to get back on the right track, and debt consolidation loans also can be useful in many situations. If all else fails, filing bankruptcy is an option that can give you a fresh financial start, but certainly it is in your best interest to avoid such action if possible.