If a debt settlement company asks a business owner to sign a contract, they must be sure to read the fine print. Many firms bury harmful terms deep in their agreements. Here are some of the biggest red flags:

1. Requiring Large Upfront Fees

A legitimate business debt restructuring firm won't charge thousands of dollars before taking any action. But many firms often include clauses like this in their contracts:

"The client agrees to pay a non-refundable Enrollment Fee equal to 15% of the enrolled debt amount upon signing this agreement."

If a business is already struggling with debt, handing over a large lump sum doesn't make sense. The FTC warns that it is illegal for business debt relief firms to charge fees before they've settled or renegotiated at least one debt.

In recent years, many debt settlement firms have realized they can't get away with blatant upfront fees, and while some still try, others have adapted by using their 'no upfront fee' policy as a selling point to appear legitimate. In reality, they've simply shifted their profit model—leaning harder into the more obscure, deceptive clauses that follow.

2. Delaying Creditor Negotiations Until You Save a Lump Sum

Many firms instruct businesses to stop paying their creditors and instead deposit money into an escrow account. Their contracts often contain language like:

'Settlement offers will be presented to your creditors once your settlement account accumulates 20% of the enrolled debt.'

This is one of the most dangerous clauses because it directly leads to legal action. MCA lenders do not wait—they seize assets, freeze accounts, and intercept business receivables. By the time the firm acts, it's often too late.

Even more troubling, many of these firms require that escrow accounts be held in their name rather than the business owner's. This not only strips the business of control over its funds but can also give rise to serious legal claims, including tortious interference and fraud. By inserting themselves between the business and its creditors under the guise of "relief," these firms create even greater legal exposure for their clients—turning an already precarious situation into a legal minefield.

3. Claiming Specific Debt Reductions

Be cautious of business debt relief companies that claim they can reduce your debts by a fixed percentage before negotiations begin. Their contracts may include language such as:

'Our program aims to settle your enrolled debt for an approximate 57% reduction of your principal balance.'

No company can guarantee a settlement amount before speaking with creditors. MCA lenders, in particular, rarely accept major reductions or long-term payment plans because their business model relies on aggressive collection tactics. Any company making these promises is misleading you.

4. Hidden Fees That Inflate Costs

Some firms hide their true fees deep in their contracts, using terms like "inactive debt fees," "settlement extension fees" and "success fees." Consider each and how they impact any potential savings or relief:

4.1. "Inactive Debt Fees"

"If within 120 days of a settlement offer, a creditor fails to respond to our settlement efforts, we are entitled to reclassify the debt to an 'inactive' status, which will incur a resolution fee of 35% of the original enrolled debt balance."

These hidden charges mean that even if a creditor never agrees to a settlement, the business still owes the firm thousands in fees.

For example, if a business enrolls $100,000 in debt and its creditor either refuses to settle or is never even contacted, the business could be charged $35,000 in "inactive debt fees." This deceptive clause incentivizes the so-called settlement firm to avoid contacting the creditor altogether—allowing them to collect a 35% fee after 120 days of inaction. Instead of finding relief, business owners seeking help often end up with even more debt. Unfortunately, this predatory tactic is a fundamental part of many 'debt relief' business models.

4.2. "Settlement Extension Fee"

"For each additional month a settlement's payment terms are extended, an added 1% of the total debt will be charged as a settlement extension fee."

In this example, if the creditor insists on payment in full over 36 months, you would be paying an extra $1,000 per month in extension fees, adding up to $36,000 in fees—without reducing your actual debt.

4.3 "Success Fee"

Many settlement firms claim they are entitled to 35% of any negotiated balance reduction—framing it as a "success fee."

Let's break this down with real numbers:

Suppose a settlement firm negotiates a 25% reduction on a $100,000 debt, seemingly saving the business $25,000. At first glance, this might look like a win.

However, when you factor in:

• $36,000 in extension fees
• 35% of the $25,000 reduction ($8,750) as a success fee

The total cost to the business owner? $44,750 in fees—on an original $100,000 debt—just to achieve 'relief' of $25,000.

Instead of finding financial relief, business owners can end up paying nearly double what they were 'saved,' making these settlement arrangements anything but a real solution.

5. Early Termination Penalties That Lock a Business In

If the debt relief company isn't delivering on its promises, the business owner might try to cancel. But many firms make it expensive to leave, using clauses like:

"Should the client terminate the program early, client agrees to pay an early termination fee equal to 2% of the remaining enrolled debt for each full or partial month in the program."

Let's say a business enrolled $500,000 in debt into a program, paying an upfront enrollment fee and expecting assistance. After two months, the MCA lender froze their accounts and seized their receivables, leaving them unable to continue operations. Realizing the debt relief firm had done little to prevent this outcome, the business owner decided to cancel.

With a cancellation penalty of 2% per month, the firm would charge:

$500,000 × 2% × 2 months = $20,000

This means the business, already shut down and out of funds, would still owe the debt relief company an additional $20,000—on top of any fees already paid. These penalties ensure the company profits even when its service fails to protect clients from financial disaster.