Managing Your Small Business Debt
Written by Gloria Zhu   


If you find your small business in debt, the best choices for a settlement are unsecured debt negotiation, loans, and credit cards.

The first step to debt negotiation is to contact the creditors. To do so, there are companies that specialize in debt negotiation and settlement assistance; but it is your discretion depending on how much you owe to hire a representative.

If you decide to go about this yourself, contact the creditor and ask to speak with a manager authorized to negotiate. Briefly explain your circumstances, and make an appointment for a personal meeting if possible.

Tip: A face-to-face meeting demonstrates that you are serious about resolving your problem, and allows you the undivided attention of the person you are dealing with.

It’s also a good idea to take notes of all conversations, regardless of how they are conducted. Sign and date all your notes for records.

Negotiation Strategy
Your goal is to be perceived as someone who is willing to positively approach a deal that is mutually acceptable. Do not threaten to close your accounts or you will be seen as someone who is irresponsible and is simply looking for an easy way out.

To begin, your first offer should be less than you are willing and able to pay so that you can allow room to negotiate their offer. Again, creditors are more willing to negotiate for a lesser amount with you rather than have you not pay back the money you owe.

The two most common approaches for debt negotiation are to pay a lump sum that is less than the total amount owed, or to organize the payment schedule into smaller, multiple monthly payments.  You can read more about this on this article.

Negotiate a Reduced, Upfront Lump Sum Payment
With the first option, you negotiate a reduced, upfront payment that permanently cancels the entire debt. Time is money here—many creditors will only accept this approach because their goal is to erase the debt from their books without having to wait an extended period.

Many creditors sell delinquent accounts to collection agencies, usually for a fraction of the account value. All the agency needs to do to make a profit is to settle for something slightly above the amount they paid for your account. Keep this in mind as you try to reach a settlement. Be patient and firm, and resist the temptation to raise your offer during the negotiation process. You can ask that the collection be removed from your credit file as a condition of settlement, but that will not erase the detrimental impact of the original creditor.

The fallback here is that if you are already struggling with your current debts, it may be difficult to raise the cash necessary to accomplish this. In this case, you may consider the second option to reduce the principal and possibly stretch out the payments.

Settlement is a quick and efficient means of reducing your debt load by effectively eliminating a portion of your remaining principal. If you are making the minimum payments on a credit card, settlement also saves you the significant interest charges racked up every month and achieves finality without destroying your ability to secure new credit.

Tip: Request your credit file be updated to reflect that the debt was settled in full once a settlement is achieved. This demonstrates you’re making the effort to resolve your financial difficulties. A well-structured settlement also avoids the need for a debt consolidation loan that may require collateral assets. It’s unwise to risk other assets for a new loan if you’re eliminating unsecured debt.

Loans
If you find yourself in a situation in which only loans will work, there is also a process that goes along with it. Banks and other lending institutions cite risk factors as their main reason for turning down small business loan requests from startup businesses. Yet, you can still get a loan for your business by proper preparation.

The main requirements of attaining a small business loan are your personal credit history, business plan, experience, education, and feasibility of the business you are starting or expanding.

The most important task to obtain a small business loan is preparing a business plan. The business plan needs to show the lender that providing you with a small business loan is a low-risk proposition. Your business plan must answer the questions a lending institution would ask. These questions usually are:

How much money do you need?
Here, accuracy is important, so request enough money to invest wisely.

What are you going to do with the money?
You will have to provide, in detail, the designated use of every dollar requested. A small business loan is often needed for: operations (new employees, marketing, etc.), assets (equipment, real estate, etc.), or to pay off business debts.

When will you repay the small business loan?
Explain in detail how this small business loan will serve as a stepping-stone for your business. You will need to convince the lender (with your financial statements and cash flow projections) that you are able to repay the loan through the expected long-term profitability of your business.

What will you do if you don't get the loan?
Let lenders know that rejection will not discourage you from starting or growing your business. You want to portray a confident and determined personality and you will try lender after lender until you receive the money you need to get your business moving.



 
Last Updated on Friday, 24 December 2010 06:29