Debt Consolidation and Stacking: Double Trouble for Your Business
When your business finances are crunched and you are exploring options, beware of two rapidly-proliferating threats: (1) predatory debt consolidation and (2) successive, aggressive financing (commonly called “stacking”).
Debt Consolidation
A tall promise.
During a challenging business week, a debt consolidator may opportunistically contact you and pitch them negotiating with your creditors on your behalf. Unscrupulous firms may promise results that are unrealistic, such as settling of your all debts simultaneously and/or eliminating obligations altogether. To get the process started, the debt consolidator may have you sign documents and then require you to start depositing funds from your business into an account that the consolidator controls.
Problems multiply.
The debt consolidator will then likely advise you to stop paying the debts of your business. If you comply, your business will default on its financial obligations and your creditors will inevitably try to contact you.
When this happens, a debt consolidator will instruct you to cease all communication with creditors. This includes not answering calls, ignoring emails, and refusing to negotiate any direct resolution.
What happens if you do communicate with a creditor of your business? Punitively, a debt consolidator might hold you in breach of their contract and may retain funds placed the account under their control. Now, you are in breach of multiple agreements.
Baiting the Hook.
And if you comply? A debt consolidator may offer you a settlement with one or two of your junior creditors, and this settlement might be surprisingly swift, as if it was prearranged. This settlement is unlikely to be for your senior obligations, but the debt consolidator will encourage you to continue to transfer funds into the account it controls for “future” settlements. This may make you feel that the consolidator’s plan is working.
However, your business’s total debt burden has only decreased slightly, and the debt consolidator has begun to collect its fees. If your business continues to make deposits, the portion of your capital that the consolidator controls will increase.
Perceived benefits disappear quickly.
In most cases, the debt consolidator will fail to resolve all your debts, and you will likely remain responsible for your largest, senior debts. Only now you will be without the funds provided to the debt consolidator, who may even refuse to return any of the funds your business transferred.
Also, your creditors may have already instructed the debt consolidator that they only work directly with their debtors, and in some cases the debt consolidator may communicate that they are negotiating with your creditors when they are not. As a result, your creditors will continue their collection proceedings against your business while the debt consolidator continues to secure greater control over your business.
In many cases, the relationship ends up with the business being sued in multiple lawsuits brought by its senior creditors and the debt consolidator ending all communication with the struggling business — exactly as it instructed the business to do to its creditors.
Stacking
The short game with your business.
Most reputable lenders and funders seek to invest in the long-term prospects of your business. In working with you, they are betting on the future success of your business, based on its model and cashflow. For them to benefit, your business must continue.
However, your business success is not equally important to all companies offering financing. Others, despite how they describe themselves, are playing a short-term game. On top of your pre-existing financing, these funders may offer you additional money, but with high finance charges over a short payback, in some cases only several weeks. Often, such companies are betting not on your business, but the capital provided by its senior financing. Accordingly, if your business’s debt obligations become unwieldy, the funders behind these stacks may still earn a profit – even if your business ends up defaulting across its obligations.
Moreover, stacking may be a breach of your contract with your existing senior creditors.
Accordingly, stacking can put your business in serious jeopardy, and you should take caution when offered additional financing by multiple companies.
Direct communication is a healthier alternative.
Luckily, your cashflow crunch doesn’t have to end in one or more of these worst-case scenarios. You can act early by contacting a creditor and being upfront about your hardship.
Most financing companies have seen and heard it all. They know how and why a business becomes distressed, and they have the quantitative means to assess the situation. It is in the creditor’s interest to work with you.
If your business is in distress, you’ll discover the advantages of financing with a reputable company — one who understands your business’ financial situation. You’ll be able to work with its representatives towards a resolution, so you can focus on keeping your business running and moving towards a brighter future.
Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.
