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What Does Business Debt Settlement Entail?

Updated on
March 16, 2024

What is Business Debt Settlement?

Debt settlement, also known as debt negotiation or debt arbitration, is the process of negotiating with creditors to settle your debts for less than the full amount owed. It can be an option for business owners with significant unsecured debt like credit cards, loans, medical bills, and unpaid supplier invoices.  

How Business Debt Settlement Works

In debt settlement, a business owner works with a debt settlement company or does it themselves by contacting each creditor and offering a lump sum payment that is lower than the total owed. This lump sum is offered in exchange for the creditor writing off the remaining balance.

For example, if you owe $100,000 across multiple credit cards, the debt settlement company may be able to negotiate with the creditors to accept a total payment of $60,000 and consider the debts settled and closed. This allows you to pay off your debts for less than you owe.

Pros of Debt Settlement

  • Settles debts for less than you owe, often between 30-60% of the balance 
  • One lump sum payment instead of multiple installments
  • Creditors stop collections efforts and agree not to sue 
  • May stop accruing interest and late fees
  • Allows you to avoid bankruptcy 

Cons of Debt Settlement

  • Creditors may initially resist accepting a reduced payoff
  • Continued late payments will damage your business's credit score 
  • Creditors may take legal action before settlement is reached
  • Debt forgiven may be considered taxable income
  • Large upfront fee for debt settlement company services
  • Process may take several months to over a year

Overall, business debt settlement can be a viable option for eliminating unsecured debts without declaring bankruptcy. But it requires careful consideration of the risks, costs, and impact on your business's finances and credit.

Assess Your Business Debt Situation

Before considering business debt settlement, you need to fully understand your current debt situation. Here are the key things to look at:

Total Debt Amount - Add up what you owe across all your business accounts and loans. This includes credit cards, lines of credit, equipment financing loans, business loans from banks, outstanding invoices to suppliers, unpaid taxes, and any other obligations. Knowing the total amount gives you an idea of the scale of debt you need to address.

Monthly Payments - Calculate the total minimum payments due each month across all accounts. This shows how much cash flow is being consumed by debt repayment currently. High monthly payments make it harder to keep up and get ahead. 

Interest Rates - Document the interest rate charged on each debt. Credit cards and other high interest rate debts above 10% or 15% are especially important to address and prioritize. The higher the rates, the faster interest compounds and the harder it is to make progress.

Type of Debt - Categorize debts by type - credit card, loan, unpaid invoices, taxes owed, etc. This helps in considering different strategies. For example, credit card debt tends to have higher interest rates and more flexible settlement options compared to a secured equipment loan. 

Having clarity on total debt, monthly payments, interest rates, and the mix of debt types puts you in a better position to assess options and develop a debt reduction strategy. Tracking these figures over time will also show your progress as you work to settle debts.

Cut Expenses and Increase Revenue 

To get your business back on solid financial footing, you'll likely need to both cut expenses and find ways to increase revenue. This balancing act can be challenging, but is necessary to stop the debt bleed and improve cash flow.

Reduce Operating Costs

Take a close look at all your business expenses and see where you can trim the fat. Consider renegotiating contracts and terms with vendors and suppliers to bring costs down. Look for unnecessary expenditures you can eliminate, such as:

  • Office space - Can you downsize, renegotiate your lease or work from home?
  • Payroll - Are there any positions you can eliminate or scale back?
  • Software subscriptions - Cancel unused or redundant apps and services.  
  • Inventory - Stop stockpiling and reduce orders to match demand.
  • Shipping and fulfillment - Renegotiate rates and terms.  
  • Equipment costs - Sell unneeded assets and reduce maintenance and rental fees.
  • Marketing and advertising - Trim budgets but avoid cutting marketing completely.

Every dollar you save goes directly to your bottom line. But be careful not to cut too far and damage your ability to operate and generate revenue.

Renegotiate Contracts and Terms 

Approach key vendors and suppliers and explain your financial challenges. See if they're willing to reduce costs, provide discounts, extend payment terms or defer payments until you're more stable. Offer to commit to longer contracts in exchange for lower rates. Get any agreements in writing to avoid misunderstandings down the road.

Increase Sales and Marketing 

During a cash crunch, it's tempting to scale back marketing and sales efforts. But this can turn into a vicious cycle, depriving you of the revenue you need to drive out of debt. Look for low-cost ways to boost sales, such as:

  • Offer discounts or promotions to bring in revenue fast. Just make sure they're profitable.
  • Step up sales calls and emails to current and past customers.
  • Tap into your existing contacts and network more aggressively. 
  • Look for new revenue streams or products you can add quickly.
  • If you have ecommerce operations, focus on search engine optimization and digital ads.
  • Don't neglect the lifetime value of existing customers. Upsell and cross-sell to get more revenue.

With some creativity and hustle, you can often increase sales without increasing your marketing budget significantly. Combine this revenue boost with lower expenses to improve your cash flow and service your debt.

Negotiate With Creditors 

As a struggling business owner dealing with unmanageable debt, one of the first steps you should take is to open up direct communications with your creditors. Being transparent about your financial difficulties and asking creditors for help can go a long way. 

Many creditors are willing to negotiate modified payment terms or temporarily lower interest rates to help distressed yet viable businesses get back on track. But they can't do this unless you reach out.

When contacting creditors, first explain your situation in full. Provide details on declining sales, rising costs, unexpected circumstances like COVID, or any other reasons why your business is struggling with debt payments currently.

Then respectfully ask for their help so you can get your finances in order. Key things to request:

  • Lower interest rates, even temporarily, to reduce the amount you owe each month.
  • Extended repayment terms so your monthly payments are more affordable. Going from 12 months to 18 or 24 months can make a big difference.
  • Temporary principal and interest payment reduction or deferral during the most difficult period. 
  • Waiving of late fees to ease your burden.

Emphasize that you want to pay back what you owe, but need some modifications to make it feasible. Offer to provide updated financial statements or anything else to aid their decision-making.

Some creditors may balk or only agree to small concessions. But others will provide significant relief if they believe it is better to modify terms than force you into default or bankruptcy. 

If the initial request is denied, be persistent and try asking multiple times. The key is to negotiate in good faith - never threaten default or make demands. Explain how proposed modifications will allow you to successfully repay the full debt amount over time.

Direct creditor negotiation should be the first debt relief strategy pursued by any struggling small business. Filing bankruptcy or using a debt settlement company will damage your business' reputation and credit. Working it out directly with creditors shows good financial management and gives you the best chance of emerging with an intact business on the other side.

Business Debt Consolidation Loans

Debt consolidation loans allow you to combine multiple debts into one new loan, potentially with a lower interest rate and monthly payment. This can make managing your debts easier by streamlining multiple payments into one.

With a debt consolidation loan, you take out a new loan and use the proceeds to pay off your existing debts. This new loan ideally has a lower interest rate than the debts you are paying off, helping reduce your total interest costs.

The main benefits of debt consolidation loans include:

  • Combining multiple debts into one new loan with one monthly payment
  • Potentially getting a lower interest rate, saving on interest expenses 
  • Simplifying debt repayment and having just one payment to manage
  • Stopping collections calls and high-interest charges
  • Having more cash flow as monthly payments decrease

Banks, credit unions, and online lenders all offer debt consolidation loans. To qualify, you'll likely need good credit and steady income. Collateral like your business assets may be required, especially for larger loan amounts.

The risk is that if you don't qualify for a low rate, the new loan could end up costing you more in interest over the long run. Be sure to shop around and compare interest rates. Carefully consider the pros and cons before using your business assets as collateral.

Debt consolidation can be a smart strategy, but make sure the terms make financial sense for your business first. Work with a reputable lender and read all loan documents closely before signing.

Business Debt Settlement Companies

The core service offered by debt settlement companies is negotiating with your creditors to reduce your debt balances. They will contact each creditor and try to get them to agree to settle for a lump sum that is less than what you owe. This can potentially save your business money compared to paying off the full balances.

However, debt settlement companies also charge substantial fees for their services. This is usually a percentage of the total enrolled debt, often from 15% to 25%. There are also initial setup fees. These fees come directly out of any savings from settlements.

When choosing a debt settlement company, you need to carefully vet their credentials, services, fees, and success rates. Things to look for:

  1. Licensing and Accreditation - Make sure the company is properly licensed in your state. They should also be accredited by organizations like the American Fair Credit Council.

  1. Reviews - Check third-party review sites to see feedback from past clients. Look for any complaints about aggressive sales tactics or failure to deliver on promised savings.

  1. Fees - Get full written details on all fees you will pay and when. There should be no hidden costs.

  1. Success Rates - Ask what percentage of their past client debt has been reduced or eliminated. Reputable companies will share data.

  1. Alternatives - Make sure debt settlement is the right option before signing up. Explore credit counseling or negotiating directly with creditors yourself first.

Proceed very cautiously when choosing a debt settlement company. Thoroughly investigate options to find a reputable provider who can hopefully settle your business debt while limiting your fees.

Bankruptcy: The Nuclear Option

Bankruptcy can provide a legal means to eliminate or restructure business debt, but it should be considered carefully as a last resort due to the potential consequences. There are two main types of bankruptcy for businesses:

Chapter 7 Bankruptcy 

Chapter 7 bankruptcy, also known as liquidation, involves closing down the business, selling all its assets, and using the proceeds to pay creditors. Any debts remaining after liquidation are discharged.


  • Stops all collections and lawsuits against the business 
  • Wipes out most remaining business debt 


  • Company must cease operations permanently
  • Assets sold at auction often for far less than full value
  • Damages business credit rating for years 

Chapter 11 Bankruptcy  

Under Chapter 11 reorganization, the business can continue operating under court supervision while developing a plan to restructure debts and become profitable again. 


  • Business can continue operating 
  • Debt payments are reduced or eliminated
  • Creditors must accept the reorganization plan 


  • Expensive legal fees throughout the process
  • Reorganization plan must be approved by creditors
  • Debtor loses control over business operations

Effect on Credit and Assets

For both Chapter 7 and Chapter 11 bankruptcies, the business's credit score will take a major hit and remain damaged for years afterwards. Any personally guaranteed business loans will also affect the owner's personal credit. Under Chapter 7, all eligible assets are liquidated. Chapter 11 allows assets essential for business operations to be retained, but creditors can seize assets if the reorganization plan fails.

In summary, bankruptcy can potentially eliminate unsustainable business debt, but often at the cost of assets, credit, operations, and control. Most experts recommend considering bankruptcy only when all other options have been exhausted. The business owner must carefully weigh these pros and cons when deciding if bankruptcy is the right path forward.

Selling Your Business to Pay Off Debt

Selling your business can be an effective way to eliminate your business debt, if done strategically. The key is finding a buyer who is willing to take on your company's existing debts as part of the sale. The proceeds from the sale can then be used to pay off creditors.

When valuing your business for sale, look beyond just hard assets and consider things like brand, customers, contracts, intellectual property, and goodwill. Work with a business valuator to determine a fair asking price, and be prepared to negotiate. You want the sale proceeds to exceed your debts so you walk away with something.

To find potential buyers, start networking in your industry. Consult with business brokers who specialize in selling businesses. Spread the word to competitors, suppliers, or others who may gain strategic value from buying you. Consider both financial buyers looking for an investment and strategic buyers in your sector.

In marketing your business to potential buyers, put together a quality sales package. Include financial statements, tax returns, assets lists, contracts, and details on operations. Tout growth opportunities and customers. Bring in your management team to help sell the vision. Be transparent about your debt situation.

Structure the deal so the buyer formally assumes your liabilities. This transfers the legal obligation to them. Get guarantees on which debts will be paid off after closing. You want creditors satisfied to agree to the sale.

Selling your indebted business takes time and strategic planning, but can allow you to pay off obligations and avoid bankruptcy. Bring in advisors to market it professionally and negotiate a deal that leaves you debt-free.

Liquidating Assets

Selling off business assets like property, inventory, and equipment can generate funds that you can use to pay down debt. Liquidating assets should not be your first option, but it can provide debt relief if other options have been exhausted.  

When liquidating assets:

  • Prioritize selling off any assets not essential to business operations first. This may include company vehicles, surplus inventory or equipment, and any real estate holdings not being used. 
  • Sell quickly but avoid fire sales. Getting assets sold quickly is important to generate funds fast, but liquidating at far below market value defeats the purpose. Price assets competitively but fairly based on appraisals and market research.
  • Use a business liquidator if warranted. For large asset sales, hiring a reputable liquidator can maximize proceeds. Liquidators have experience pricing assets, marketing them properly, and negotiating deals. Their fees can easily pay for themselves through higher sale prices.
  • Apply sale proceeds directly towards outstanding business debts. Work with your creditors to apply funds from asset sales to outstanding balances. Get debts paid off or reduced as much as possible.
  • Understand tax implications. While asset sale proceeds used to pay business debt are not taxed, you may owe capital gains taxes on any profits above your purchase price minus depreciation. Consult a tax advisor to ensure compliance. 

Liquidating assets can negatively impact operations, so it shouldn't be undertaken lightly. But when done strategically, selling off non-essential business assets can provide crucial debt relief when facing financial hardship. This allows you to maintain operations while scaling back debts.

Alternatives to Business Debt Settlement 

Before pursuing debt settlement, you may want to consider some alternatives that could provide debt relief without impacting your credit score or requiring upfront fees.

Credit Counseling

Non-profit credit counseling agencies can provide free or low-cost advice and education about managing your finances. They help create a personalized debt management plan which consolidates your debts into one monthly payment at reduced interest rates. This allows you to pay off debt faster without bankruptcy or settlement.

Counselors can also act as mediators and negotiate with creditors on your behalf. The goal is to create an affordable payment plan that works for both you and the creditor. If you consistently make those monthly payments, creditors may agree to waive late fees, lower interest rates, etc. 

The downsides are that credit counseling takes 3-5 years to complete the debt repayment plan, and not all creditors will agree to the proposed terms. But it can be a good option before considering something more drastic like debt settlement.

Do-It-Yourself Negotiation

You can try negotiating directly with creditors yourself to see if they'll agree to reduced monthly payments or lower interest rates. Explain your financial hardship and ability to pay, and be prepared to provide documentation to back up your claims.

If the creditor won't budge, threaten debt settlement as a last resort. Sometimes the threat of getting much less money from a settlement company will motivate the creditor to work with you directly.

The benefit of DIY negotiation is you avoid debt settlement fees. The downside is that it's very time consuming, creditors may not agree to your terms, and you can't get your debt reduced by much. But it's worth trying before paying a settlement company.

Debt Management Plan 

A debt management plan (DMP) through a credit counseling agency can consolidate your monthly payments. The agency works with creditors to get concessions like waived fees, reduced interest rates, etc.

This helps simplify payments and pay off debt faster. However, it requires 3-5 years of consistent monthly payments to complete a DMP. The credit counselor charges a monthly fee too.

DMPs allow you to avoid settlement or bankruptcy, but don't reduce the total debt amount owed. Overall they provide structured debt relief, but aren't as quick acting as settlement.

Struggling with Business Debt?

Hopefully you have discovered ways to reduce costs, negotiate with creditors, consolidate loans, and explore debt settlement to save your company. If you are in desperate need of help, then now is the time to get in touch with us here at Cain & Daniels to assist you in settling your business debt.

Speak to a Debt Specialist Today

You will always know your settlement amount before you hire us to represent you.