If you are thinking about settling business debts then ensure that the debts that you want to settle are unsecured debts. It should not be linked to any of your assets that might have been pledged for taking loans. There are no difference in settling debts for individuals and businesses in the broader sense but there are some more technicalities involved in settling business debts. In order to understand better, it will be helpful to review what are considered as business debt.
Business debts explained
Any money that you raise for business by way of loans or similar arrangement can be grouped under the head of business debts. It could include the following.
- Business credit cards – These work in the same way as personal credit cards and provide easy access to money for business. Although the cards are issued in the name of business, as the owner you become the guarantor for it. Correctly understood, business cards are truly personal credit cards that are presented in a different manner. Credit cards for business are actually those cards that limit the liabilities to the corporation that runs the business without the need of any personal guarantor.
- Personal credit cards – Some owners take loans by using personal credit cards and use the money for business.
- Bills payable – This includes supplier payments and other credit accounts that are extended as a facility for doing business by merchants and vendors with whom you transact in business. Although this process does not relate directly to inflow of funds, it creates the opportunity of generating funds that can be used in business.
- Lines of credit – This is an arrangement provided by banks and financiers that allow business owners to access funds without taking loans. It is actually a hybrid of normal loans and credit card loans.
All avenues of funding are kept open for business needs and often used simultaneously. However, when all channels of funding are utilized it puts pressure on finances because borrowing can be costly but has to be done in the interest of running the business well. Once revenues improve, it would be sensible to reduce the burden of debts to the extent possible through business debt settlement.
Settling debts is like fighting fire with fire. You need money to settle debts and this could result in taking fresh loans. There is no harm in taking loans as long as you have the capability of paying back and the interest that you pay on the new loan is lower than the interest that you are carrying. Settlement of loan does not rid you of loans but replaces a costly loan with a cheaper one. However, in extreme situations when there is no way for business recovery, borrowers thinks about liquidating assets to square up with lenders or even go to the extent of filing for bankruptcy.
Under normal circumstances, for ongoing business seeking debt relief through consolidation of debts is the most prevalent practice because this does not have any negative impact on business.
About the author – John Carter offers consultancy in industrial finance. Having spent a large part of his two decade career with some large names in business finance, he has opened a company of his own that specializes in business debt settlement. He satisfies his passion for blogging by writing on topics related to the subject.