LumiNola / Getty Images 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.
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 businessComplying with instructions given by creditors in the processing of a claim promptlyAvoiding 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 FDCPABe in the business of collecting commercial claims for at least four yearsHave owners, partners, officers, and directors answer personal disclosure questions
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 dueIncrease the amount of time over which you’ll pay off your debtImprove 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. 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:
Federal Trade Commission Consumer Financial Protection Bureau State attorney general
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.
