Debt Collection Laws and How They Impact Small Businesses

Cafe owner getting stressed while looking at business financials
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Access to business credit is an essential tool for any entrepreneur. Options such as business lines of credit, equipment financing, credit cards, and loans will provide business owners the opportunity to develop sustainable businesses that are poised for growth.  

An inability to repay a debt, however, is an indication of a larger problem for small business owners. Therefore, it is important to manage your business debt wisely, as commercial debt collection laws do not protect businesses in the same fashion as consumer debt laws protect everyday people.  And if you do find yourself facing a debt collection agency, be proactive in reimbursing your creditors. 

“Often businesses come to me after a judgment has been entered and a creditor is knocking at the door,” said Nick Rosenberg, a partner with Boston/New York-based legal firm Gardner and Rosenberg, in a video interview with The Balance. “It is tempting for business owners to assume there is not much that can be done once they’ve been sued by a creditor.” 

Key Takeaways

  • Business debt is also referred to as commercial debt. 
  • Commercial debt can include expenses such as utilities and assets such as property and equipment as well as credit cards, leased equipment, lines of credit, or business loans. 
  • Seek guidance from accountants, attorneys, and organizations such as the Small Business Development Center to navigate commercial debt collections. 
  • There are federal and state laws related to commercial debt. These laws and protections are different from consumer debt laws.  

Rules That Govern Collecting Business Debt

Business debt, also known as commercial debt, is any financial obligation that is owed by a company such as credit card debt, lines of credit, loans, and lease equipment. Commercial debt also includes expenses such as utilities; assets such as equipment, or property owned. 

Personal debt, on the other hand, consists of revolving or non-revolving accounts such as credit cards, mortgages, student and car loans that are opened for personal use. It is also referred to as consumer debt. Like commercial debt, consumer debt can be borrowed from a financial institution or federal government. And just like business debt, it must be repaid. 

The big difference between consumer and commercial credit is the laws governing how creditors can seek repayment. The Fair Debt Collection Practices Act (FDCPA) was established to protect people from debt collectors attempting to use aggressive tactics to gain repayment. Businesses, though, are not protected under the FDCPA. 

However, commercial debt collection agencies have the ability to take a more forceful approach when seeking repayment from a business. Commercial debt collection agencies can seize bank accounts and freeze assets when seeking repayment. Instead, commercial debt collection is governed by The Commercial Collection Agencies of America (CCAA). The CCAA’s Code of Ethics was established by a group of commercial collection agencies, creditors’ rights attorneys, and law list publishers. This set of standards is used by members and creditors are encouraged to use debt collection agencies that are members of the CCAA. 

People who use debt for business purposes are not protected under consumer protection laws. Instead, their debt is considered commercial. 

States also have specific commercial laws in place to protect both creditors and debtors. Here are some examples:

  • In California, collection agencies are unable to share false information concerning a consumer or commercial debt. 
  • Colorado’s collection laws state that a collection agency must identify their business within 60 seconds of establishing that they are speaking with the correct debtor. 
  • Collection agencies in Washington cannot publish or post “bad debt lists.” 
  • It is illegal to threaten to report a business to immigration authorities. 
  • Debt collection agencies in Texas cannot bribe a debtor with valuable information in an effort to solicit or understand information concerning the business. 

The Commercial Debt Collection Process

When a business falls behind in its payments, there is a debt collection process that will be followed. Here are some common steps that are taken:

  •  Your creditors will begin by reaching out to you to seek repayment. 
  • If you do not complete a repayment plan with your creditors, individually they will sell the debt to a debt collection agency (DCA). 
  • A debt collection agency will then begin calling and sending mail to get a business owner to make a payment plan.
  •  If you meet the repayment plan requirements, the collection agency will credit your account. 
  • However, if you refuse, the debt collection agency has the right to seek legal action with the intention of seizing your assets. 

Remain committed to repaying your loans in a timely fashion. This will allow your business to rebuild its business credit. 

What To Do if Your Business Is Struggling With Debt

If your business is experiencing financial difficulties and you are unable to repay your debts, you cannot ignore the problem. Instead, be proactive in your attempts to meet your financial obligations. Here are some ideas: 

  • Call your creditors. Establish a repayment plan that will allow you to regain your good standing with your creditor.  
  • Consult your accountant. Accountants can provide guidance that will allow you to restructure your business and even develop a repayment plan with your creditors. 
  • Seek legal counsel. An attorney can represent you and negotiate terms of repayment on your behalf. 

Do not use your personal funds such as a retirement account to repay business debt. 

The Bottom Line

As a business owner, you do not have the same debt protections as consumers. Commercial debtors have the ability to seize your assets as repayment for credit that was given to you. 

If you fall behind in your payments, you must reach out to your creditors to establish a repayment plan. You can also seek the assistance of an accountant or small business development center as they have experts on staff that can support your needs. Consulting legal counsel should be considered the last resort when managing commercial debt as it can be a costly expense. 

Frequently Asked Questions (FAQs)

What happens to debt when a business closes?

When a business closes, the debt still needs to be repaid. Any debt that you have personally guaranteed such as a Small Business Administration (SBA) loan or equipment leases will still remain your responsibility. It is not uncommon for someone to file Chapter 7 Bankruptcy to erase this debt. 

How do you reduce debt in business?

To reduce debt in your business, you will need to work with an accountant who can provide you with the guidance to restructure your debt and help you avoid more debt. You will also need to find creative ways of capitalizing on the business. 

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Article Sources

  1. Collection Bureau of America. “Commercial Collection Laws by State Summary.” 

  2. Collection Bureau of America. “Things to Know About Collections Company For Small Business.”