Shop Around and Compare Offers
No matter the advertisement, there is no one “best” company for all situations. The right lender depends on your business’s financial situation, credit profile, and goals. In practice that means how long you’ve been in business, your revenue, and your credit. Each lender has different criteria. The best company is the one that gets you a loan that you can get approved for, and that will be easy and affordable for you to repay.
A consolidation loan allows you to borrow money to pay off several outstanding loans or credit cards. Why would you ever do that? Aren’t you just getting yourself further into debt? Not necessarily. You now owe only a single debt and you only have to make one debt payment. This simplifies life. If the interest rate and terms of the new loan are better than the other loans it replaces, it’s a good deal. Term loans and SBA loans usually work best, since they tend to offer the most competitive rates and the longest repayment terms.
Lenders want to see a certain amount of time and revenue in business, to understand your ability to repay and your financial health. Requirements vary, but be ready to show at least one year in business, a personal credit score of 670 or higher and at least $50,000 in annual revenue. Because the new loan adds to your debt load, the lender will check that your revenue and cash flow can carry the payment.
Where should you start looking? Banks and credit unions, especially those where you already have an account or accounts, are a safe place to start. They tend to have the lowest rates, especially for existing customers. But online lenders are innovative, convenient, and accessible. Marketplaces such as Lendio, Lendzi and Biz2Credit have relationships with multiple lenders, which could help you find a good deal. If you need financing quickly, online lenders are usually faster than banks and credit unions. If you can wait it out, go the bank route, and save a few dollars on interest. Don’t just apply to one lender. Shop around and compare offers, because every business is different and the best option may be different for each business.
When you compare offers, ask for the APR. It’s your true interest rate, because it takes other charges into account, especially the origination fee. Some lenders charge an origination fee of 0.05% to 10%, especially if your credit is lower. We always recommend comparing APRs - not just the interest rate. Also, make sure you check for hidden fees. No one likes surprises, especially a surprise when it comes to making payments. Read the agreement for prepayment penalties, late fees and monthly admin fees.
When You Apply
So how do you actually go about it? You must have a list of all of your business debts, including interest rates and repayment terms. Be sure to make it a comprehensive list - that means your business credit cards, too. Get the payoff amount for each one; the total is what you need to borrow. Then you need to make sure that, after you’ve consolidated the loans, your payments will still be manageable. If they’re not, you either need to shop for a different loan or figure out how you can make it work. Confirm that each lender allows debt consolidation, because some restrict businesses from using their funding to pay off other debts. Many lenders let you prequalify first. That means you don’t have to submit a full application - they ask questions to assess your credit risk, and give you an idea of what you might be able to get if you applied. When you apply, expect to hand over bank statements, tax returns and financial statements. If you’re approved, look at the offer you’ve been given and calculate the monthly payment, and then think about how much interest you’ll end up paying. Is it better than the total of all your current payments combined?
But at the same time you need to go into the loan with your eyes wide open. Consolidation won’t change the amount you owe; it only changes who you owe it to. Debt is debt, and loans are loans. You can’t escape your obligation. Yes, the consolidation loan has eliminated each of the other debts. But you are now in debt for a new loan, and you still have to pay it back, interest and all. This is a fact that’s easy to forget when you’ve gotten rid of the pressure of multiple payments and the chaos of a morass of repayments. A longer term may reduce the monthly payment. This can be helpful if you are on tight cash flow. But it may mean you will end up paying more in interest in the end. And almost every business loan requires a personal guarantee. This means that you are ultimately responsible for the loan if the business can’t repay it. Because consolidation does not create or destroy financial resources, it’s best used only when you think you will be able to pay back your consolidated loan.
If you’re turned down, go back over everything you submitted. Was everything in order? Did your application meet the minimum criteria? Look for mistakes and missing information that would have caused a rejection. If it all checks out, you will probably need to first contact the lender you applied to. Ask for the specific reasons. Once you understand why you were declined, you can make adjustments to your business and your application. This can include updating your credit information, taking steps to improve your personal or business credit score, paying back your debt, or increasing your company revenue. Bringing on a co-signer or waiting until the business has more history can help too. Whatever the cause, take the time to address the issues before trying to apply again.
A new loan isn’t the only option, either. Some lenders will let you use a personal loan to help pay down business debt, which can be useful for microbusinesses or merchants who don’t have access to traditional business lending. Or, if you’ve got equity in a home, at least 20% of its value, a home equity loan or HELOC may be cheaper than a business loan or a credit card, but you risk losing your home if you can’t repay the loan. A rollover for business startups, or ROBS, lets a C Corp tap your retirement account without penalty, but mistakes can bring heavy fines, so it’s best to consult a financial professional if you plan to investigate a ROBS.
Consolidation is the right move if it reduces your interest payments or gets your debt payments down to an affordable amount. We encourage you to take as much time as you need before moving forward, and to always have a long-term plan.
