Small business debt can be worrisome and stress-inducing. As the owner of a small business, you may have concerns such as whether you will make payroll and whether you can pay your monthly bills. If you’re behind on your bills right now, creditors already may be contacting you to try to collect payment. When you find yourself in this situation, you’ll be faced with several debt relief options that can be used to reduce or completely clear your small business’s debt.
The first option to consider is debt consolidation. When you choose to consolidate, you combine multiple debts into a single, larger loan. You’ll take out one large loan and use the money from the new loan to pay off the rest of your debts. By doing so, you’ll only owe one creditor and won’t owe your original lenders. It simplifies your monthly payments by replacing a few or more separate payments with one larger one. It can also help you negotiate lower interest rates and more advantageous repayment terms.
Debt consolidation can save your business money in interest or give it more time to pay off debts. However, there is only so much this strategy can accomplish. If your company is in more trouble than debt consolidation can fix, you may have to consider more drastic solutions.
You may want to consider selling your company if it is still profitable. It may be possible to sell it for a large enough sum that you can use the money to repay all the debts. Alternatively, you may find a buyer willing to buy the company along with your debts. In such a case, the buyer agrees to inherit the company’s existing loans.
If your company has too much debt, it will hinder your ability to find a buyer. If you can’t find a buyer, it may be best to halt business altogether and close up shop. Then you could sell off each of the company’s assets individually, raising funds to put toward debt payoff. Shutting down your business affords you an opportunity to negotiate with your creditors. It shows them that the business cannot pay its debts but is trying to raise the funds to do so. This may convince creditors to view the company more leniently and to consider a settlement. If they agree to a debt settlement, you will be responsible for repaying an agreed-upon portion of the owed amounts rather than the full debts.
In some cases, this is not enough to clear a company’s debts. If you are still unable to meet the requirements of your creditors, you may have no choice but to file for bankruptcy. There are two main types of bankruptcy available to your small business: Chapter 7 and Chapter 11.
When you file for bankruptcy under Chapter 7, you state to your creditors that you do not intend to repay your company’s debts. You agree to the complete liquidation of your company’s assets, meaning all assets are sold off to raise funds. The funds are then distributed among your creditors to partially repay loans, and typically all your business’s remaining debts are forgiven.
Bankruptcy under Chapter 11 has less permanent repercussions and allows your company to continue operations. Chapter 11, also called reorganization, provides a way to restructure your company and its debts. If your company files for this type of bankruptcy, you will need to come up with a repayment plan that must be agreed upon by all creditors. The repayment plan will involve the partial or complete repayment of loans. The company will then have three to five years to complete the plan. After it is finished, typically all remaining debts are forgiven.
