Business credit cards are among the best financing options for small businesses. For startups, a business credit card is the financing lifeline that also helps build business credit. Furthermore, even if your business is qualify for a business loan later on; a business credit card can also be used for routine purchases. The word of caution, irresponsible faster spending than you can pay could results in pile of business credit card debt for your small business.
You are not the only who needs a lifeline for overspending. Many small business owners also require understanding of how to recover from business credit card debt. According to a survey, business owners owed around $50 billion of outstanding credit card debt in March 2018 and this spending is projected to grow almost $200 billion along with the debt in the coming years.
Instead of getting anxious about the pile of money you owe, start following best practices to repay the debt to work with a fresh start. We have listed top tips and advice to recover from business credit card debt plus you can rebuild your credit to move forward.
Factors that Build Credit Card Debt
A business credit card is an ideal financing option for startups and established businesses since it doesn’t require a certain amount of time and revenue to qualify. According to the US Small Business Administration (SBA) in 2017, almost 12% of startups use business credit cards to operate successfully.
The only thing banks consider when approving credit cards is the personal credit score of the borrowers. If you’re responsible with your personal debt, you’re considered lower risk by the lender and can easily secure a business credit card.
Personal Guarantees and Business Credit Cards
Though you’re securing credit card for your small business, there’s a possibility that a lender might require a personal guarantee before issuing you a credit card. Adding a personal guarantee assures a lender that, the debt can be collected from you personally in case you’re unable to pay back your business credit card debts.
The credit card companies are focus on extenuating their risk, and they require some kind of assurance that they’ll not lose their money. They want to add personal liability clauses in the agreement—and they impose on every business type, whether it’s a sole proprietorship, partnership, S-corp or C-corp.
Such personal liability clauses surpasses any legal shields that your business affords. For example, while your LLC or LLP business is protected from corporate lawsuits, you’re personally liable with personal liability clauses legally.
What Happens When the Business Bankrupts
Even if your business goes down, you’re unfortunately still personally liable to pay the debt. This is why it is important to understand and choose the right approach to recover from business credit card debt. Even with your name on the business card, lenders will be on you personally.
On the contrary, if you have a business credit card without any personal guarantee, which is very rare, the business debt liability will based on how your small business is standardized.
The Debt Collection Process
There a bright side of this: the lenders can’t just knock on your doors unannounced to collect the debt from you personally. In order to collect an unsecured credit card debt, they have to file a suit and get a judgment against you.
This collection process takes time and money, which is why lenders might be willing to work with you to offset the balance or create a payment plan that suits your cash flow.
8 Ways to Recover From Business Credit Card Debts
To recover from a credit card debt, you need proper planning and execution. To help you get out of the debt, here is a checklist to pay off your debt and leave the financial burden behind:
- Pay your high-interest debts first.
- Negotiate with your credit card company.
- Save money by cutting operating costs.
- Get a loan to consolidate your credit card debt.
- Refinance your business credit card debt.
- Resolve your credit card debt.
- File for bankruptcy.
- Rebuild your business credit
- Pay your High-Interest Debts First
The first step towards recovering from credit card debt is to start paying it before it gets overdue. If you’re unable to repay it on time, that’ll not only hurt your credit score, but also make your financial condition worse.
If you have multiple credit card bills due, focus on paying off first that cost you more including your outstanding balance and its APR. Instead of paying a little money to each balance, pay your high cost balance in full or paying nothing at all, definitely.
- Negotiate with your Credit Card Company
The second way is to negotiate with your credit card company, though it’s not the best solution but an easy step towards recovering from business credit card debt.
Discuss with your credit card issuer for some easy affordable payment plans. They might be willing to offer you lower interest rates, scheduling repayment dates, or can even settle on the amount you owe. But this is best suited for those with a good past track record. Based on your outstanding debts and the payments history, there is a chance to make some progress than you presume.
- Save Money by Cutting Operating Costs
Saving money by cutting your operational costs can also help in debt reduction. Start by answering questions like why are you spending money, and what are you spending it on will help manage your operational costs. Get your business evaluation closely and quantitatively from an accountant, or an independent consultant. Examine your variable costs if you need a place to start on your own. There is a change you might be unable to reduce your costs of operation, for instance, but you can work out the non-fixed expenses, which ultimately help free up the cash you need to pay your credit card debt.
- Get a Loan to Consolidate your Credit Card Debt
Getting a debt consolidation loan can also help you recover from the business credit card debt. You can work with a lender to secure a small business loan to pay off your credit card debt.
Term loans and SBA loans are among the best options to recover form a credit card debt. These loan types offer shorter monthly payments and longer payment cycles. You will receive a lump sum amount of money to pay off your debt directly without accruing more interest every month. The only drawback of consolidation loans is that, you need to have a good credit score to qualify.
- Refinance your Business Credit Card Debt
Refinancing your debt can help If you’ve debt on multiple credit cards. Managing multiple payments on monthly basis can be hard, and if you miss one, it can put you on a road to more overdue payments. Your debt starts to stack across all cards, plus interest.
Check your eligibility and refinance your business credit card debt with a balance transfer to a 0% introductory APR business credit card lower. These types of credit cards offers extended periods with no-fee balance transfers to pay off your debt free of more interest. Your balance will be lower when the 0% interest period is over. Refinancing is a good option if you’re not eligible to apply for a small business loan.
- Resolve your Credit Card Debt
If you can negotiate balances on your outstanding personal debts, you can also settle your business debts, because both are the same thing. By working with your business credit card companies or banks, you can settle your credit card debt.
The creditors aren’t trying to get a judgement against you in the first place, since they want to collect as much of their outstanding balance as possible. Hence, there is a possibility you might end with up with a settlement on paying off a portion of your debt. Once a settlement is done, you’ll have to pay upfront so make sure you’ve cash to settle the amount. This way, you will not still be accumulating debt with late payments and it’ll be affordable than your outstanding debt.
Instead of filing for bankruptcy, getting a settlement is a better alternative. While pursuing settlement, it’s advisable to approach directly to your credit card issuer in order to avoid a business loan scam.
- File for Bankruptcy
It should be your last option. If you’re exhausted and out of options to recover from your business credit card debt, its time to file for bankruptcy and to do that, you should know what’s required for filing.
Chapter 11 Business Bankruptcy process allows you to declare bankruptcy but by submitting a reorganization plan in bankruptcy court, since the process restructures the business to be more competent and to be able to pay off the creditors. Here, you’ll get legal protection and time to create your plan along with the opportunity to recover and keep operational. Filing for bankruptcy is not sensible since the decision will stay on your credit report for up to a decade.
You can also file for Chapter 7 personal bankruptcy If you can’t pay your debt, and is entirely liquidated, and it has become your personal debts. You can have your business credit card debts relieved with Chapter 7 personal bankruptcy, once your case is settled. But remember, a personal bankruptcy will stay on your personal credit history. So, think TWICE before making your move!
- Rebuild Your Business Credit
Around one third of small business owner use credit cards and if you’re among the list, focus on rebuilding your business credit. Once you’re able to rebuild it, creditors can trust you with debt again.
Rebuilding credit doesn’t just happen overnight and it also influence your capability to qualify for good business credit cards in the future—you’ll need solid credit score to qualify for small business loans. Plus, the healthier your credit score will be, the better loan terms you can avail with lenders.
The first step towards rebuilding your credit is to apply for a secured credit card. A secured credit card offers a security deposit for your credit line, and if you don’t pay back, the card issuer will keep the deposit. Once you start making consistent payments, you’ll see improvements in your credit score recovery.
Working towards recovering from business credit card debt might looks difficult in start but it’s worth the effort. Recovering debt, regaining creditors trust, and eventually rebuilding your credit score will help to be on the road to success so you don’t have to incur business credit card debt again.