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Comparing Business Debt Consolidation vs Debt Settlement

By Spodek Law Group | February 20, 2024

Business Debt Consolidation vs Debt Settlement: Which is Better for Your Company?

Dealing with significant business debt can be incredibly stressful and make it difficult to focus on running your company. When facing large amounts of debt, many business owners consider debt consolidation or debt settlement to try to find a manageable solution. But it’s important to understand the key differences between these two debt relief options before deciding which path to take.

What is Business Debt Consolidation?

Business debt consolidation involves taking out one new loan to pay off multiple existing debts. The goal is to simplify debt payments by rolling several debts into one, ideally with a lower monthly payment and interest rate.

Popular types of debt consolidation loans for businesses include:

  • SBA Loans – Small Business Administration (SBA) loans offer government-backed financing and typically have lower interest rates than conventional bank loans. However, they can be more difficult to qualify for[1].
  • Bank Loans – Banks may offer debt consolidation loans, lines of credit, or business credit cards to consolidate other debts. Approval is based on your business’s creditworthiness.
  • Merchant Cash Advances – These loans provide a lump sum in exchange for a percentage of your future credit card sales. The repayment structure can be complex.

The main benefits of debt consolidation include:

  • Lower monthly payments
  • Reduced interest rates on some debts
  • One simple payment vs multiple debts
  • Improved cash flow from reduced payments
  • Possible improved credit from payment history

However, there are also risks such as:

  • Closing costs and fees
  • Collateral requirements
  • Damaged credit if missed payments
  • Higher total repayment costs over loan term

So while consolidation can provide short-term relief, it’s important to consider the long-term costs.

What is Business Debt Settlement?

With debt settlement, you work with a debt settlement company to negotiate directly with creditors to settle accounts for less than what is owed. The goal is reducing debts by 20% to 60% typically.

The debt settlement process involves:

  1. Stopping payments to creditors
  2. Setting up dedicated account to accumulate settlement funds
  3. Debt settlement company negotiates with creditors on your behalf
  4. Creditors agree to settle debt for lump sum payment
  5. Debt settlement company pays negotiated settlement amount

This can resolve business debts while paying only a percentage of what is owed. However, there are risks to understand as well:

  • Damage to business credit score
  • Potential lawsuits from creditors
  • Tax implications for cancelled debt
  • Accumulated fees and interest during settlement period
  • No guarantee that all settlements will be approved

So while debt settlement can eliminate debt, it can also further damage business credit and finances if not done properly.

Key Differences Between Business Debt Consolidation vs Settlement

When deciding which option may be best for your small business, consider these key differences:

Debt Consolidation Debt Settlement
Consolidates multiple debts into new loan Negotiates with creditors to settle debts for less than owed
Typically need good business credit Business credit score less important
Lower interest rates possible Interest continues accumulating during settlement period
Monthly payments continue Stop monthly payments to creditors
Resolve debt while keeping business assets Potential for legal action from creditors
Total repayment could be higher over loan term Total savings of 20% to 60% of debt if successful

When Debt Consolidation May Be Better

Debt consolidation loans tend to work best for businesses that:

  • Have strong revenue and cash flow
  • Have good business credit score
  • Own significant business assets to use as collateral
  • Seek lowest interest rates to reduce costs

If your business matches this description, reducing interest rates and consolidating payments into one monthly bill can provide flexibility and simplicity.

When Debt Settlement May Be Preferable

Debt settlement often makes more sense for businesses that:

  • Have very poor cash flow
  • Have damaged credit scores
  • Have few assets to leverage
  • Owe taxes or other non-negotiable debts

If your business is struggling severely financially, settling major accounts for pennies on the dollar may be the most viable path back to stability.

Finding the Right Solution for Your Business

As you can see, business debt consolidation and settlement take very different approaches to resolving debt troubles.

The right option depends entirely on your specific situation in terms of business health, assets, revenues, credit score, and type of debts owed.

Before deciding on consolidation or settlement, be sure to [2]:

  • Consult professionals – Speak to business lawyers, accountants, financial advisors to understand all options.
  • Review finances thoroughly – Analyze cash flow, credit, debts to see full financial picture.
  • Research multiple providers – Vet banks, lenders, and settlement companies thoroughly.
  • Read all terms carefully – Scrutinize interest rates, fees, risks and contract details.
  • Consider long-term impacts – Will solution hurt or help finances in the coming years?

While being in significant debt is an overwhelming and scary situation, taking the time to make an informed decision about debt relief can save your business. Consult experts, understand all viable options, and determine what realistically aligns best with your company’s financial circumstances and future goals.

Business Debt Consolidation and Settlement Resources

For more information on business debt consolidation or settlement options to deal with money troubles, helpful resources include:

Articles and Guides

Business Debt Relief Companies

Government Resources

Legal and Financial Advisors

Dealing with substantial business debt is difficult, but understanding all your options is the first step towards finding the right solution. Take the time to evaluate debt consolidation loans and settlement plans in relation to your specific situation. With professional guidance and smart planning, you can resolve debt while saving your business.

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