When you are owed money, it can be difficult to let go of that debt. After all, you worked hard for that money and you deserve to be paid back in full. However, there are times when forgiving a debt could be the right thing to do.
We are a world of creditors with around $8 trillion in net debt owed annually by corporations and small businesses. It’s not easy to let debts go unpaid, especially when you have a right to collect. In this blog post, we will discuss the pros and cons of forgiving commercial debts. We will also provide some tips on how to forgive a debt in a way that is fair for both parties involved.
Pros and Cons of Forgiving a Commercial Debt
Usually, in a pros-and-cons piece, we’d start with the upside. But in this case, it feels more beneficial to address the obvious first. Namely, your fears that go along with not getting paid for the time and resources that you’ve put into something. Here’s what you already know:
Forgiving the Debt May Not Be Financially Feasible
You never want to let go of more than you can afford to lose. If you’re a small business owner who is owed $50,000 by a large corporation, it’s probably not in your best interest to forgive the debt. The loss of that much money could put you out of business, especially when you know full well they’re capable of paying it.
On the other hand, if a friend owes you $500, forgiving the debt may not make as big of a financial impact. In this instance, you may be able to afford to let go of the money and move on.
It Could Still Be Harmful to the Debtor’s Credit
This largely depends on whether it’s the type of account that would report to a credit agency. Forgiving the debt on the basis of an inability to pay doesn’t instill a lot of confidence in that debtor’s future ability to borrow and repay as per their agreements. If you’re forgiving the debt to be nice, this could be an unforeseen consequence.
It Alters Your Relationship With the Debtor
There’s a good chance you’ll think twice about extending credit to them in the future. Also, that tension, even if you’re not meaning to show it, can shine through and damage your relationship moving forward. With that said, there are still a few reasons to consider doing it.
Forgiving a Commercial Debt Might Improve the Relationship
For example, if the debtor is a friend or family member, forgiving the debt may improve your relationship. Oftentimes, money can put a strain on personal relationships. So if you’re able to let go of the debt and move on, it could make things better between you. It is seen as a sign of good faith, which can help to boost overall morale and encourage future business dealings.
It May Be Better Than Going Through Collection
The process can create hostility, eat into your profits, and still be unable to prevent you from ending up in court. Plus, if you’re going it alone without the aid of a debt recovery service, you might be violating rights and regulations with the approach that you use.
There Could Be a Tax Advantage
For this, you’ll want to speak with your accountant. However, it’s entirely possible that you could save on taxes by forgiving the debt. The debtor would be responsible for paying any taxes that are due, but it’s a way to get some money back while also doing something nice in the process.
How to Forgive a Commercial Debt
If you’ve decided that forgiving the debt is what you want to do, there are a few things to consider.
1. Talk to the creditor about your plans to forgive the debt. Let them know that you want to do what is best for both of your businesses, and ask if they have any objections or suggestions.
2. Determine how (or if) you can work with one another moving forward. This ensures the account doesn’t fall behind and that you’re not both in the same situation. This plan should take into account how much the debtor can afford to pay, as well as the scope of what you can do for them.
3. Consider forgiving just a portion of the debt to make repayment for the rest more feasible. A discount for paying early or making on-time minimum payments can work well here.
Look, it’s our business and goal to get you every last dime you deserve. But if you are a business owner thinking about forgiving a commercial debt, our team at Southwest Recovery Services can help. We have years of experience helping businesses recover money that is owed to them and also doing a cost-benefit analysis as to whether certain actions are preferable.
We understand the importance of maintaining good relationships with creditors, and we will work hard to get you the money that you deserve. Contact us today for a free consultation.