How Much Does Business Debt Settlement Cost? 6 Steps to Build the Cash Budget

How much business debt settlement actually costs

Thank you for visiting our website. This article is about how much business debt settlement actually costs. In this article, we'll talk about different steps you can take to build your cash budget and eventually pay off those onerous business debts and merchant cash advances. If you're thinking about business debt settlement and settling your debt, most importantly, you need one number: how much cash will this take and when?

To put it politely, that's the entire game. If you have that answer, everything becomes a lot easier. If you don't know the answer, things are going to become increasingly difficult because it's impossible to win when the answer is zero. Settlement is a cash deal. The only thing you're negotiating is whether you pay that cash upfront or pay it over time. You are obviously offering less than the full balance, and the creditor has to accept a smaller payoff. It's your job to prove why the creditor needs to do this. If you cannot pay fast, the deal falls apart.

Most owners, always under budget what they might need for a potential business debt settlement deal. They only see the discount. They forget fees, taxes, legal costs, timing, and the cost of hiring a company to handle this for you. And most often than not, they run out of cash a quarter of the way through. Here's what settlement really costs and steps you can use to build a budget which will hold up.

Here's what settlement really costs

Here's the short answer on cost. The math is pretty straightforward and honest. Most MCA debt will settle for less than the full balance owed. A common industry range is around 30 to 70 percent of the remaining balance, with many MCA stacks settling for even 40 to 60 percent. So if you owe $100,000, the payoff might land around $30,000 to $70,000. Some will settle lower, some settle higher, but it all depends on the facts of your case and more specifically the health of your business.

But don't get it twisted, the payoff is only part of the cost. Budget also for things like the cost of hiring a company, legal fees, tax on forgiven debt, and more importantly, the whole time you still have to stay current on rent, payroll, and vendors. Often most business debt settlement companies are going to charge 15% to 25% in most programs. In addition, you should put a cushion for tax and legal. So $100,000 in debt might actually need $50,000 to $90,000 to resolve by settlement and fee.

What actually is making up the cost of a business debt settlement program

So what actually is making up the cost of a business debt settlement program? Think about it in four different buckets.

• First is the payoff to the creditor to actually close the debt.

• Second is the fee for the help.

• Third is for additional costs like attorney time, court costs if sued, and bank fees.

• Fourth is going to be the tax on the forgiven debt.

Fees typically work in one of two ways. Some firms will charge a percent of the enrolled debt, often around 15% to 25%. Some states cap that to 15% for consumer debt relief. Others charge a percent of your savings. Often they'll charge around 30% to 40% of your overall savings. It's important before you hire a business debt settlement company to know which model you are being offered and onboarded with.

There is a federal ban on advance fees for telemarketed debt relief, but that only really applies to consumer credit card debt. Business MCA settlement is different. It's commercial, so different rules do apply. That doesn't mean anything goes. You should ask for when are fees earned, whether it's due per settlement or on a monthly basis, and if you pay when a deal fails. And more importantly, get it in writing. Don't take their word for it or an email format.

On taxes, the IRS is clear. If a lender cancels $600 or more, it usually reports it on Form 1099-C. You're going to generally have to report that as income unless an exception like bankruptcy or insolvency applies. Typically speaking, at this stage, you want to have a CPA involved as well who can guide you through it.

List every debt with the real payoff number

So what's the first step to really do this correctly? You should list every debt with the real payoff number. Set up a Google spreadsheet. List every merchant cash advance or other balance, and write each funder's name, the remaining balance, the daily or weekly payment, and whether there's a UCC lien, personal guarantee, or a lawsuit already in motion.

You should use the current payoff balance, not the original amount. Funders are going to price the settlement based on what you still owe and how hard collection will be. You should also add the total balance and the total monthly payments. If your debt payments are exceeding 20 to 30 percent of your gross revenue, it's likely that growing your business alone is not going to solve it.

Finding your true free cash flow each month

Step two is finding your true free cash flow each month. It's important you pull the last three months of your bank statements, figure out what your average monthly deposits are, subtract things like payroll, rent, cost of goods, insurance, utilities, things of that nature, and of course payments on debt you must keep, like a truck loan. What's left is considered free cash flow.

You shouldn't use projected sales because who knows when that'll actually occur. You have to actually use what hits the bank. If your revenue is falling, then use the lowest month. Many owners will find that they only have a few thousand dollars left. If only 500 is left, you have to cut costs or the plan will take too long.

Price the settlement and the fees side by side

Step three, price the settlement and the fees side by side. Take your total enrolled balance, look at the run it on a low basis, middle basis, and high basis. And for example, for an MCA stack, try 40, 55, and 70 percent. Multiply the balance by each for a rough payoff range before fees, then add the fee.

If the fee is 20 percent of, say, 100,000, then add $20,000 to each case. At 50 percent, that is going to be $50,000 plus 20,000, or 70,000 total. At 40 percent, it'll be around 60,000. At 65 percent, it's going to be closer to 85,000. Bottom line, know exactly what you're going in for because at the end of the day, everyone has to get paid: the lender and the settlement company that's going to be helping you resolve this business debt.

Mapping how and when you'll pay

The fourth step is mapping how and when you'll pay. Creditors love it when you give them certainty of payback and speed. A lump sum hits both angles. A lender is getting the lump sum that they want, and they're getting it all in one shot. They don't have to stress over this over the next year, and they're willing to play ball because most of these guys are going to lend the money back out at 100 to 200 percent APR and make their money back within six months. Monthly payments over a year will usually cost more if they are accepted.

So you have to decide now: am I saving for a lump sum one creditor at a time, or am I looking for payment plans? You have to divide the middle case total by monthly free cash flow to get to a point where you're saving months. If you need 70,000 and save 7,000 monthly, that's going to be roughly 10 months. Now, needless to say, that is a very long hold period for creditors. Having said that, if you've got daily MCA debits choking your payroll, it might make sense to restructure your debt over an extended period of time. Often, lawsuits or frozen accounts will jump ahead and make it so you prioritize that lender first.

Adding legal, taxes, and obviously a cushion

The fifth step is going to be adding legal, taxes, and obviously a cushion. If $40,000 is forgiven at a 25% combined rate, then you should budget about $10,000 in extra taxes. Your CPA can help you walk through this and see how to structure this. There are other costs, though, that need a fast answer, such as legal lawsuits. You may also pay for agreement review, UCC releases, and other judgment work.

You should typically ask for a flat range. A few thousand dollars per case is common to budget. Then you should add a 10 to 15% cushion. For example, on a $70,000 middle case, you should hold around $7,000 to $10,000 on the side. If it's unused, it just stays in the business.

Stress test it and then make the call

Step six is simple: stress test it and then make the call. You really have to stress test your budget and see if it has elasticity. For example, if revenue drops 20%, what happens then? What if the settlement lands high? What if a funder sues you in a month or two? Try to rerun the scenario with different savings and different payoffs. If it still works month over month and over the next year, then it's a solid plan.

Obviously, after 12 months, the risks rise. Long plans will fail when owners will raid the fund and the debits keep draining and you have no money to use. Then you have to choose: am I cutting costs hard or settling fewer debts now, or am I getting bankruptcy advice from an attorney?

What really will change your final number

As you contemplate what to do next, here's what really will change your final number. A few facts are going to matter more than anything. What is the age of the debt, how much you repaid, and whether the funder can collect fast through a confession of judgment, a lien, or a frozen account. The more leverage they have that they can actually use to hurt your business, the bigger the number is going to be.

Current revenue obviously matters most. A closed business with no revenue settles differently than an open one with strong cash flow. First position funders often will want more, and in addition, personal guarantees will increase pressure. But funders still want cash now over a long, drawn-out fight.

The bottom line is this

The bottom line is this: settlement is a payoff. It's your choice how you want to pay it off and when. Depending on that answer, you will be able to come up with a game plan that works for you. Once you pick the plan and the approach, the next step is planning your cash. On this webpage, we've listed a few business debt settlement companies who can walk you through this process.