Do people have business debts as an entrepreneur? They would, of course. Practically, good debts exist and many companies have been able to flourish due to that. The issue arises when these companies become so deeply in debt that it impairs the business.
So, what can entrepreneurs do to keep their business from drowning in debt? Here are a few effective methods that can help entrepreneurs reduce existing business debt and avoid new ones.
Separate the debt from financial accounts. If a bank loan is taken, it’s necessary to keep the funds separate (checking and savings). Many loan agreements allow banks to deduct money from the funds without notification if the borrowers are having financial issues. If an entrepreneur is already struggling with the financial flow, he or she won’t appreciate that the checking account has been drained by the creditors.
Make sure the taxes are current. Entrepreneurs must pay all business taxes on time. Payroll taxes are deducted from the paychecks, and the business should pay these taxes within the due date. The IRS and state’s tax authorities can consider the entrepreneur personally accountable for these business taxes and levy fines if he or she doesn’t pay them.
Don’t transfer business properties to save them. Many business entrepreneurs become desperate for financial aid and transfer their company’s assets to friends or family, to hide these assets from creditors. However, many creditors can trace these transfers and retrieve the property. An entrepreneur might be penalized and may face civil or even criminal fraud charges due to that action.
Communicate with creditors and lenders. Entrepreneurs may do a few things here to help reduce the overall debt or interest payments over time.
Look for ways to reduce interest rates. Entrepreneurs may lower interest rates via negotiation with the creditors. Transferring existing credit card balances to a balance transfer credit card with a 0% introductory APR is the most common way to reduce credit card debt. Entrepreneurs should contact their loan manager to discuss all the alternatives to manage the bank loans. If they have made on-time payments and their company is in good financial status, it would be helpful to get interest rates reduced.
Consolidate debts. An entrepreneur can lower monthly expenditures by consolidating debts into a single payment, with a stable interest rate and without affecting the credit. An example is using a debt consolidation loan to pay off all the unsecured debts, or taking payday loan debt assistance to get out of the payday loan trap, etc.
Make an application for a hardship plan. An entrepreneur should find out whether he or she is eligible for a “hardship program,” and get a lower interest rate with a payment extension. An entrepreneur must provide a hardship letter to the creditor, explaining the current financial hardships to pay off the debts. Required papers are tax returns, financial statements and other financial documents.
Don’t pay one creditor over another. As per the bankruptcy law, the court will check the payment history of an entrepreneur and might create trouble if he or she prioritizes some creditors over others. In the case of a company being compelled to file for bankruptcy, the bankruptcy court will investigate all payments made to creditors over the previous year to discover if the entrepreneur provided any creditors special treatment. An entrepreneur may lawfully pay one creditor with an unsecured loan before others if the entrepreneur is not in bankruptcy. Still, secured creditors (those who hold property as collateral) are given preferential consideration.
Employ the services of a debt-restructuring firm. If entrepreneurs are having trouble getting out of business debt, hiring a professional debt-restructuring agency that can negotiate with the creditors and collection agencies would be best for the business. The debt-restructuring agency would charge a fee, and formally extend, renegotiate or amend current credit agreements.
File for bankruptcy protection. There are two types of bankruptcy petitions for entrepreneurs. These are Chapter 7 and Chapter 11. In Chapter 7 bankruptcy, a business stops its operations and closes its doors to everyone. In Chapter 11 bankruptcy, the entrepreneur may try to reorganize the debts, start the operation once again, and make profits.
Final Takeaway
Entrepreneurs must understand that their business should borrow only the money it requires, not anything more. Also, they must not waste funds until it is essential for their firm. The business should always pay off the debts as quickly as possible by focusing on the high-interest debts.
Lyle Solomon is a principal attorney for the Oak View Law Group in California, where he specializes in consumer finance, including payday loan debt assistance, and has written several articles on financial well-being.
Many business entrepreneurs become desperate for financial aid and transfer their company’s assets to friends or family, to hide these assets from creditors. However, many creditors can trace these transfers and retrieve the property.
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