Commercial Debt Negotiation: 5 Terms to Decide Before Making the Offer

Think before you settle your merchant cash advance or business debt. Get the real payoff amount and who’s responsible for the balance. Decide whether you can pay a lump sum or need a payment plan. Demand a release of business and personal guarantees and withdrawal of any lawsuit or UCC lien. Also, agree on what happens if you miss a payment. Rushing settlement can lead to a new default.

Merchant cash advance companies often use hardball collection tactics like threatening lawsuits and calling bank and credit card processors. That doesn’t mean you can’t negotiate a deal. Don’t rush under a sense of foreboding. You may have more leverage than you think.

Don’t assume that the funder’s payoff demand is correct. It may inflate with default, NSF, and attorney fees, or even claim payment acceleration. If you have a complete record of deposits and payments made, including wire and ACH transfers, add those up and compare the total with what the funder says you still owe.

The first step in talks about a payoff or payment plan usually begins with the lender’s idea of the balance. An inflated or unsupported balance gives you leverage in getting it back where it ought to be. If you can show that the funder’s expectations were tied to revenue and business just fell off, ask for reconciliation of its payout demands, including bank and merchant processor statements. A refusal may be leverage for you.

Watch for the tax effect of forgiven commercial debt, since the IRS generally sees that as taxable income to you for the year in which it gets wiped out. Some lenders report debt forgiveness to the IRS with a Form 1099-C. The general rule is that cancellation of debt is taxable, but this does not apply to bankruptcy, and it does not apply to non-bankruptcy debt if you are insolvent just before the debt cancellation, but up to the amount you were insolvent for. If that applies, you’ll need to report it on a Form 982.

In early talks with the funder, a lump sum may win you the biggest discount on the payoff, since the lender gets its money now. But a lump sum may be risky if it will strain your operations. A payment plan spreads the balance over time, eases your cash flow, and makes less of a dent in your working capital. Under a plan, the UCC filing and personal guarantee may remain, releasing only when the payment plan ends. Measure installment promises against your sales revenue, not optimism. It’s up to you to be able to pay in a timely way. If you aren’t sure about this, don’t agree to a payment plan. Suggest an affordable amount and pay period that work for you.

If you owe on an SBA loan, an offer in compromise (OIC) normally means a lump sum payment of what’s offered, usually within 60 days of approval. SBA will keep the guaranty in force and the lien on your home until the OIC amount is paid in full.

Whichever way you pay, nail down exactly who is being released from the loan agreement. Release of personal liability protects you from being dragged back into the deal if something later goes wrong. But it’s up to you to make sure that the release includes both you personally and the company. Just because the deal ends does not mean you’re released, too. Ask whether the release is immediate or after full payment, and what happens if payment later runs into trouble.

If a lawsuit is filed by the lender, ask for a written settlement and release including whether the case dismisses with or without prejudice, when that is filed, whether any stipulated judgment is part of the deal, and whether fees and costs are included in the amount to be paid.

A UCC filing can keep you from obtaining new financing, refinancing, or selling assets. Settlement should confirm that the UCC is terminated, state exactly who files it, and say exactly when it is filed. If there is nothing more owed and no more advances are promised, once the secured party gets your written demand to terminate the financing statement it must send or file the termination within 20 days.

The federal debt collection law regulates calls and collection methods for consumer debts. It does not apply to business debts. This means that a settlement has to specify what stops when, including automated bank pulls, phone calls, and anything the funder might say to the processor or customers about you.

The most common mistake in a business debt payoff is agreeing to a too big weekly payment, just to get the pressure to stop. Skip a payment and you may owe the whole loan balance plus fees or be facing a court judgment.

Before you sign a settlement or payment plan, make sure it’s a number you can handle, month in and month out, not just in a good month. Check the plan against your most recent cash flow statement. A slow month is a better guide than a fast month. The plan should be acceptable to you for payroll, taxes, rent, bills, and vendors. What happens if you miss a payment? Ask whether you can cure it if you miss one, and if so, how. Make sure that a late payment does not trigger the entire outstanding balance, fees and costs.

You might be in a rush to get over this and get on with other things, but before you toss in the hat just to get out, double-check that this is what you want. Be clear on what the deal does and what it does not do. Get it in writing, keep a copy, and follow through.