How To Deal With Small Business Debt

Learn the legalities and how to protect your small business

Stressed cafe owner looking at paperwork
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It’s easy for a small business to get into debt. Inventory and rent prices can go up unexpectedly, and sales can drop without warning. While incurring some debt is part of doing business, too much of it can undermine your operation and even shut it down. Fortunately, there are protections and options available to protect small business owners and help them manage and pay off debt. 

Below, we’ll look at some of the legal protections impacting small businesses when it comes to debt and how business owners can deal with debt collection. 

Key Takeaways

  • Business debt is not protected under the Fair Debt Collection Practices Act.
  • Some collection agencies follow a code of ethics but it is not legally required.
  • Business debt can often be renegotiated and restructured.
  • Small businesses can emerge from debt with careful budgeting and negotiation. However, some may have to consider bankruptcy.

Commercial Debt Is Less Protected

The Fair Debt Collection Practices Act (FDCPA) was set up to protect individuals from aggressive debt collectors. Unfortunately, the Act only applies to consumer debt, which leaves businesses more vulnerable to aggressive collections actions.

The CCAA Code of Ethics

Though businesses aren’t protected under the FDCPA, they do have some assurances from high-level organizations that focus on debt. For example, the Commercial Collection Agencies of America (CCAA), a nonprofit organization of commercial collection agencies, has created a code of ethics for debt collectors that deal with business debt. This code includes several guidelines for its certified organizations including: 

  • Maintaining a high standard of fairness, honesty, and courtesy in the conduct of business
  • Complying with instructions given by creditors in the processing of a claim promptly
  • Avoiding deceptive practices, statements, or materials that would cause debtors to believe they are dealing with someone other than the member

Meanwhile, another organization, the Commercial Law League of America, a legal network of attorneys specializing in commercial collections and bankruptcy, has many of its own requirements for certification. To be certified, potential members must, for instance:

  • Comply with state and federal licensing and registration laws and the requirements of the FDCPA
  • Be in the business of collecting commercial claims for at least four years
  • Have owners, partners, officers, and directors answer personal disclosure questions

While collection agencies that are members of the CCAA must follow the code of ethics, it is not binding for nonmembers. This means that your debt collector may or may not follow these basic ethical procedures, so check for certification.

How To Deal With Business Debt Collections

If your business is in debt, you’ll need to confront the problem directly. First, you’ll need to interact with your creditors—negotiating with them if they’re reasonable, and reporting them if they’re abusive. Then, you’ll need to set up a payment plan that takes your financial situation into account. If necessary, you may need to consider bankruptcy.

Negotiate With Creditors

Most creditors want just one thing: to get paid.  And while it’s certainly possible for a creditor to sue you, the reality is that lawsuits can be expensive and difficult to manage. Thus, many creditors will be willing to negotiate with you to ensure payment.

One way to negotiate is through debt restructuring, which involves figuring out the problem and calculating what you can afford before discussing your debt issues with creditors. Through debt restructuring, you may be able to:

  • Change the amount that’s due
  • Increase the amount of time over which you’ll pay off your debt
  • Improve your financial bottom line

If your debt situation is not too dire—you just need a little extra time to pay, for example—you may be able to negotiate with creditors on your own. 

If you are in serious debt and are not sure whether you will be able to pay it off, it may be helpful to contact a debt expert to help negotiate with creditors on your behalf or consider refinancing or consolidation.

Another option is to contact a debt restructuring company to help you. However, just to be safe, you’ll want to review their practices and reputations carefully before moving forward.

Report Creditors and Collectors Engaged in Unfair Collections Practices

While your business debts are not covered under the FDCPA, you have the right to report creditors and debtors who are in violation of the rules set out under the act. For instance, if your debt collector is a member of the CCAA and claims to be following its code of ethics, you have a valid reason to report its unfair practices. You can report problems you have with a debt collector to the following parties:

Look Into Bridge Financing

In some cases, your financial problems may be temporary. Natural disasters, for example, may cause short-term interruptions to shipping or make it more expensive to buy the materials you need to produce your merchandise. 

When you determine that there isn't a long-term impact, you may decide to apply for bridge financing—loans or credit that allow you to pay your bills now and repay the loan over time. There are many potential sources for short-term bridge funding; options include:

  • Friends and family
  • Bank loans (often with collateral)
  • Small Business Administration loans
  • Credit cards (usually not the best option, but if you are expecting a windfall soon and can get a zero-interest card for the short term, it may be a reasonable choice)

Improve Your Margins

If you’re able to set up a payment plan or receive a bridge loan, now is the right time to re-examine your financial situation in order to improve your profit margins. There are a number of steps you can take to lower costs and pay off excess debt. Here are a few to consider:

  • Assess your debt by determining exactly what you owe to whom for which purchases. 
  • Determine which debts have the highest interest rates and consider paying those down first. Alternatively, it may be possible to renegotiate bank and credit card loans to reduce interest rates.
  • Lower costs by reducing payroll, lowering rent or other expenses or otherwise spending less on day-to-day costs.
  • Sell anything you can. For example, if you own a building, you might be better off selling it and renting a smaller space. You may even be able to share certain expenses with other business owners.

Consider Bankruptcy Options

If you’re in debt to the point that even renegotiation, bridge loans, and improving your margins won’t help, it’s time to consider bankruptcy. Bankruptcy is a legal process that allows your business to eliminate debt or repay it under the guidance of a bankruptcy court. There are three common types of business bankruptcy: Chapter 7 (liquidation), Chapter 11 (reorganization), and  Chapter 13 (for debtors with regular income). While bankruptcy may allow you to walk away from your debt, it can also damage your credit rating. This may make it more difficult to start a business in the future.

Frequently Asked Questions (FAQs)

Does the Fair Debt Collection Practices Act apply to businesses?

No. The FDCPA currently applies only to individuals. However, there was a bill introduced in Congress in 2019 called H.R. 5013, the Small Business Fair Debt Collection Protection Act, which applies consumer debt collection protections to small businesses. It has yet to make its way through the House of Representatives.

What are debt collectors legally allowed to do?

Debt collectors can send you letters, contact you directly, or sue you if you don’t pay. They can also negotiate with you to reduce or restructure your debt. They are not allowed to lie to you or threaten you with actions that are not legal.

What are commercial collections?

Commercial collection is the collection of outstanding debts owed to a business by another business or by an individual for a business-related debt. This task is managed by commercial collectors, who are third-party contractors who specialize in collecting debts for and from businesses.