If a company has unmanageable debt, the founders may consider bankruptcy as their best way forward, but it’s not the only option. You can still be eligible for several alternate solutions that might help you avoid the long-lasting consequences of bankruptcy.
According to an August 2020 U.S. Census Bureau Small Business Pulse Survey, nearly 79 percent of small businesses have felt a moderate-to-large negative effect from the pandemic. Therefore, it’s a good time to discuss some common ways that can help entrepreneurs navigate challenges beyond bankruptcy.
Before adopting any of the following strategies, you should review your finances with a credit counselor or finance attorney to evaluate your situation. Ensure that your company is up to date with all fees, remittances and taxes that you owe to the government. You should also update and maintain a thorough inventory of the company’s assets and liabilities. In addition, locate, organize and review all relevant documents for accuracy, including all financial statements and profit and loss statements. Once you’re ready with all of these things, you can consider checking out the following six alternatives based on your financial situation.
Get Help from a Credit Counseling Agency
Credit counseling services can provide you with assistance to assess your finances and manage your debt. Some counseling services can even negotiate with creditors on your behalf to increase your repayment time and lower your interest rates. Therefore, counselors can help people with limited financial knowledge avert a bankruptcy filing.
A nonprofit credit counselor can help you develop an alternative plan to tackle your debts or consolidate them through a debt management program. A free credit counseling session can help you review your finances and discover which option works best for you. You should also carefully investigate a company’s track record before signing up for any counseling services.
Find a Replacement Lender
A business may be able to find a replacement lender to pay off its existing creditors. However, pinpointing a replacement lender on reasonable credit terms can be a difficult endeavor for a business on the verge of bankruptcy. There are professionals in the business of procuring financing or capital infusions for troubled businesses, although they may charge a substantial commission.
Before finding a lender, a business should first devise a restructuring plan that demonstrates it can make sufficient cash flow on a going-forward basis to enable creditors to receive a positive ROI. Start with reviewing the historical financials of the business, then prepare projections of cash flow, profit and loss and balance sheets for the term of the repayment plan. You can also consider using an outsourced financial advisor to prepare these financial projections.
Debt Settlement or Management Plan
A debt management plan (DMP) is an informal agreement allowing you to make reduced payments to your creditors based on your level of disposable income after your priority payments and living costs are taken into consideration. The DMP lasts until you pay all of your debts in full. You can sign up for a free credit counseling session with a certified credit counselor to find out whether or how you can adopt a DMP.
Considering a debt settlement or DMP can allow you to avoid the courtroom and do less damage to your credit score. You can attempt to convince the creditor to take the lump sum reduced amount to immediately settle a debt. The companies that help you in debt settlement often do not collect a fee until they reach a settlement and you’ve made at least one payment to the creditor. If you’ve got multiple creditors, they may charge a fee for each settlement.
A debt consolidation loan can provide you with a new sum of money that you can use to pay off your current debts. Instead of paying different creditors each month, you’ll only pay one consolidated amount each month. It could be a personal loan from a bank or credit union or a home-equity credit line that allows you to borrow against your house. A home equity line of credit may offer you an alternative to borrowing against the equity in other properties.
The new loan allows you to renegotiate the interest rates and repayment terms. With lower interest rates and better repayment terms, you will usually save money in the long run while still working toward paying off your debts. However, you should always seek financial advice before taking out another loan when you’re already in financial difficulties.
If your income isn’t strong enough to make debt payments, consider selling assets. If you’ve got valuable assets, you might be able to reduce debts enough not to file bankruptcy. You can direct the money you receive through your asset sales to settle your debts. Make sure you retain the assets that are essential to operating your business. Then, you can develop a repayment plan with a creditor that allows you to pay off debt in smaller installments.
Negotiate a Repayment Plan with Creditors
Negotiating a debt repayment plan requires specific skills, so it’s good to consult a financial counselor or advisor to develop a realistic and manageable proposal to persuade creditors to accept a long-term installment agreement. A financial advisor can often assist you in preparing the financial projections of the business, communicating with creditors, and formulating, negotiating and implementing the plan.
Negotiation is an arrangement between you and your creditors that allows you to make affordable debt repayments across a set period. It is an attempt by a debtor to solve a financial problem with the consent of creditors outside of a court proceeding. In this arrangement, creditors are normally repaid through future cash flow, new financing or an equity infusion.
Before offering a repayment plan from future cash flow to creditors, a business must prepare a concise plan that outlines how it will generate positive cash flow to repay its delinquent debts. You can negotiate for lower interest rates and reasonable payment schedules to allow the business to continue to operate without court supervision.