Despite an economy that appears to be booming, many small business owners have a very thin margin of error to work with. Lack of reserves, seasonal business, extreme weather unpredictable tariffs, shutdowns and the new, constantly shifting economy all threaten the vitality and future for many small business owners. This is compounded by the fact that it is very difficult for most small business owners to obtain conventional financing. In fact only 20% of traditional business bank loans are approved for small business owners.
As a result, many small business owners have turned to alternative lending (often referred to as FIN-TECH) or financial technology. This is essentially online financing that is easily accessible and easy to qualify for. There are some solid programs (factoring loans, equipment financing, term loans) that have reasonable rates and terms but there are twice as many predatory loans out there waiting to ensnare the business owner.
I am talking about Merchant Cash Advance loans, which are structured as a purchase of future receivables in order to avoid the laws and regulations surrounding traditional lending. This is easy to obtain financing, but it comes at a high risk, with astronomical interest rates and a very high pay back (sometimes up to 150% or even 200%).
To make matters worse, most of these types of loan have daily withdrawals as part of the contracted payback (some are weekly). This means that each and every day the small business owner’s bank account is being drafted by the lender, regardless of business volume, extreme weather, off season etc. As described before, there is very little margin for error with these types of loans because a bad week or two can put a business owner into a tough position and in order to keep the business running and meet payroll they dip into personal funds or take out ANOTHER Merchant Cash Advance Loan. This can start a vicious cycle that puts small business owners in an unsustainable position.
The finance “experts” and “gurus” will give business owners pie in the sky strategies to reduce their business debt. For example.
Obviously, this is always a goal for all business owners, but often easier said than done, especially if every dollar that is going in is going out.
Unfortunately, many business owners we speak with have cut staff and payroll because they are in such dire straits. If the business owner is not at that point yet, this is an obvious fix if there is any room to lower the costs.
This can work in some cases. You likely will not have any luck with business credit card lenders if you ask them to reduce your payments. In a small percentage of cases, a Merchant Cash Advance lender will work with you TEMPORARILY to reduce payments but BEWARE—the second you change anything or do not adhere 100% to their contract you are technically considered in default and they can come after you (Confession of Judgment, UCC Lien, seizure of assets/bank account, redirection of credit card receipts etc.). It is a slippery slope for a small business owner to try and renegotiate terms directly with their MCA lender as the playing field is completely slanted against them.
Once again, this is a mantra repeated by the self- help gurus, but they don’t always realize what it is like to walk in the shoes of the over-extended business owner. Yes, this is a common sense proposal and way to reduce your debt, but it is something that will only work for business owners who identify the problem early and actually have the ability to cut some corners to make it work.
Bankruptcy is an option of last resort for business owners. Chapter 7 can wipe out all unsecured debt if you meet the means test, but BEWARE!!! Merchant Cash Advance Loans do not always fall into this category and may not be dischargeable. Additionally, a bankruptcy stays on your credit for 7 years and will make it difficult for you to open a business in the future. Business owners also look at Chapter 13 or Chapter 11 to reorganize their debt as well. If you are in desperate mode and it seems there is no way out it would be worthwhile to at least contact a bankruptcy attorney to determine what options are available.
One of the best ways to reduce and restructure business debt is to hire a debt restructuring company. The good ones will be accredited by the American Fair Credit Council and will offer Attorney representation. A debt restructure will lead to a reduction in payments and an increase in cash flow while ensuring that the lender still gets paid back—just with terms that are more favorable to the business owner. This is a situation where both sides win. If you are a small business owner struggling with business debt this is definitely an option you should seriously consider as you determine the BEST way to reduce your business debt.