Debt usually refers to money owed by one party, the debtor or borrower, to another party, the lender or creditor. However, there is a big difference between consumer debt and business debt, especially with how the debts are collected when they are in default status.
Consumer Debt
A debt is considered a "consumer debt" if it was primarily accrued for personal, family, or household purposes. The collection of consumer debt is regulated by federal law under the Fair Debt Collection Practices Act (FDCPA). The statute is intended to curb debt collection harassment and punish misleading and deceptive practices while proving protection to consumers. If a collection agency has violated your rights, you could be entitled to a statutory award of up to $1000, plus they pay for your fdcpa lawyer fees.
Examples of consumer debts are personal credit cards, car loans, and unsecured personal loans. People use the borrowed money to “consume,” or buy items such as cars, furniture, electronics, vacations, and food. Credit cards and personal loan proceeds can also be used for almost anything, such as emergency medical expenses or rent and utilities. For consumer credit, lenders will look at the individual’s FICO score in order to tell whether or not the person is a risk before granting a loan. If the debt later becomes a problem, there are more restrictions on consumer debt as compared to business debt. These laws ensure people’s rights and liberties are not violated.
Business Debt
Business debt is a little different. In order to get approved, a lender may look at the owner’s personal credit score and any financial reports for established businesses. These reports might include a balance sheet, income statement, banking statements and a statement of cash flows. The lender might also ask for tax returns and debt to equity calculations. Because business debt is generally higher, lenders go to great lengths to ensure the business is viable. They can also use this information to establish interest charges that cover the potential risk.
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Companies also spend on different things. The loan proceeds will be used as capital to operate the business according to credit agreements and can be used to pay salaries, operating costs, or for raw materials or capital equipment. The collection process is also less stringent. Collectors of commercial debts are not subject to the FDCPA, but they must still conduct themselves lawfully. Business debt collectors are less restricted because of the assumption that a business owner can be held to a higher level of accountability as opposed to a consumer.
There are also more kinds of debt available to businesses than to consumers. Like individuals, businesses can use credit cards in order to fund their operations. However, these have slightly different terms than would be utilized by a consumer. Business credit limits tend to be higher, mostly because owners tend to need to make more expensive purchases. Businesses can also get lines of credit, which provides the flexibility that regular loans do not. An owner can borrow up to a certain limit and pay interest only on the money borrowed. You can then draw and repay funds as you wish, as long as you don’t spend more than your credit limit. Owners can also get merchant cash advances (MCA), which allows people to get a sum of money in advance of credit card sales. The business owner and the advance company determines a set amount of interest to be paid on the advance, and to pay the advance back, the advance company will take a percentage of each credit card transaction until the debt is repaid.
It's not unusual for MCA lenders to request that the borrower execute a personal guaranty or even enter into a confession of judgment. These allow the lender to expedite collection of a defaulted balance against the business, and against the guarantor, which is oftentimes the business owner.
If you’re having problems with either consumer or business debt, don’t hesitate to give us a call. Our experienced business debt relief attorney is dedicated to protecting all borrowers and defending their rights. Contact us at (888) 301-0584 or fill out our online form to schedule a free initial consultation today.