Government Debt Relief Programs for Businesses

Carl Andrews

Financial Advisor
Updated: 7/2019

Government Debt Relief Programs for Businesses

There are many reasons why a business might face trouble with debt. After all, the economy can be unpredictable, and with world events happening at a faster pace all the time it seems as if nearly anything can upset your business’s cash flow. Many businesses seek loans and lines of credit to cover unexpected shortfalls. However, if the situation doesn’t improve, the payments on this debt can place your business in a precarious position.

The government recognizes that businesses, especially small businesses, are essential to the economy. Moreover, it also understands that sometimes a business can have tremendous potential even if it is currently suffering under debt. In order to address this situation, there are several government programs that can help businesses deal with their debt. It’s important to note that, while none of these programs are guaranteed to turn your business around, they all provide options for dealing with debt which can be far superior to other debt relief options.

SBA Loans

The most commonly used government program for dealing with debt is an SBA loan. The SBA, or Small Business Administration, is responsible for encouraging and facilitating the growth of small businesses. It does this by offering a range of different loan programs. While these loans cannot be used directly to pay off debts, they can provide the working capital your business needs to cover its debts while it grows so that you don’t have to worry about running out of money or missing opportunities due to lack of capital.

SBA loans offer more favorable terms than commercial loans. The SBA doesn’t give loans directly. Instead, it subsidizes loans from private lenders through a loan guarantee. A loan guarantee works as a promise by the government to cover all or most of the balance of a loan should the borrower default. As a result, these loans are much less risky to the lender. Therefore, they carry a much lower interest rate than other commercial loans.

SBA loans can take time to process. The government is rigorous when it comes to reducing the risk it has to cover a defaulted loan. Therefore, if you need money for your debts in the short term, an SBA loan might not be the best option for you. Moreover, you’ll need to prove that your plan for repaying the loan is viable and that your business will contribute to the overall economy. There can be other requirements, depending on the type of loan you get. Some loans require that you hire a worker for every X dollars of your loan. Other loans are used to obtain physical capital like equipment and property so your business can grow.

ARC Loans

The SBA does have a type of loan that is specifically designed to help businesses resolve outstanding debt. This is known as an Automatic Rate Cut loan, or ARC for short. An ARC loan can be for up to $35,000 and is used to help business owners service currently outstanding debt. There are several qualifications for an ARC loan. First, the business must have been open for at least two years. Moreover, the business must have generated a profit in at least one of those years. Additionally, to obtain an ARC loan you need to be able to demonstrate that your cost of doing business has risen by at least 20%, or that your sales have fallen by at least 20%. Finally, you need to provide a business plan which includes projected cash flow for the next two years so you can demonstrate that you’ll be able to repay the loan.

ARC loans are a good option for many small businesses, especially those that have a sound business model but have run into unforeseen complications which have caused them to take on an unsustainable amount of debt. ARC loans have all the benefits of other SBA loans, but they are used explicitly for the purposes for servicing debt. This is important, as some types of SBA loans have restrictions on how you can spend the money you’ve borrowed.

US Cooperative Extension Service

If you need help with your credit and debt but don’t want to take on a new loan, then the US Cooperative Extension Service might provide a solution. This service provides credit counseling to small businesses and is designed to help those businesses reduce their debt load. When you have a better understanding of how credit and debt work you can negotiate better terms for the credit products you use.

The US Cooperative Extension Service works through land-grant universities in each state. The program does not distribute any loans or grants, so it won’t offer a solution to short-term cashflow or working capital issues. However, it’s a good place to go to get a better understanding of your options to help your small business get the debt relief it needs.

Bankruptcy

While this isn’t considered the best way to pay off debt it is an option. This is the last resort option that your business should take if there’s no other choice available to you. There are several different types of bankruptcy. The most commonly used bankruptcy option by businesses is called Chapter 11. This process is also known as restructuring. It involves entering into court-supervised negotiations with creditors to restructure the terms of your debt. During the process your business may have to sell assets to generate sufficient capital to make the process a success. These assets can include vehicles, equipment, property, or anything else of value. Once the Chapter 11 process is complete, your business can operate again with a reduced debt load.

There is another type of bankruptcy known as Chapter 7. If bankruptcy is the last resort option for businesses, Chapter 7 is the final throw of the dice. Rather than simply restructuring your obligations and selling off select assets, Chapter 7 involves a complete liquidation of your business assets, which are divided up amongst your creditors. Upon completion of Chapter 7 proceedings your business will have no debts, but it will also have no assets. As a result, it is most often used to shield owners from liability and isn’t used to help a business continue operating.

Carl Andrews


Carl has years of experience helping people tackle debt. As a Senior Financial Advisor, he knows the ins and outs of debt consolidation and debt management. He holds a Masters Degree in Finance and according to him, not all debt problems are the same and that’s why it’s important to take a look at the different options available for your situation.

 

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