If you are juggling several business credit cards, lines of credit or merchant cash advances, debt consolidation can be an attractive option to help you streamline payments and reduce costs. It’s a process where you take out one loan and use it to pay off your other business debts. The new loan lets you consolidate your debt and make one monthly payment to just one lender. If you carry multiple high-cost business debts, then a business debt consolidation loan may be worth investigating. While a lower interest rate and monthly savings are possible, they’re not guaranteed.
So you’ll want to ask: Is it right for my business? How does debt consolidation work? Here’s your answer.
Consolidating business debt works much like consolidating other debt, in three steps:
- First, the borrower decides which debts to consolidate and which to pay off and manage separately.
- Then, an approved loan from a bank, online lender or credit union may cover the selected debts.
- Next, the new loan is repaid under the lender’s agreed terms.
Before you jump in, remember that debt consolidation is a bit more complicated than it may sound at first. A good place to start is to compare debt consolidation lenders to make sure you’re getting the best terms. You may even want to check your personal credit score first because some lenders will use that when deciding whether to give you the loan and at what interest rate. Finally, you should know that debt consolidation isn’t the same as refinancing your existing loans and debt.
The two terms are sometimes used interchangeably. Consolidation is when you take out a new loan, usually to pay off several old loans or credit card balances. This streamlines your payments and may get you a lower interest rate.
Refinancing business debt is like consolidation but with two key differences.
- First, it can be just one loan.
- Second, the main aim is often to get a lower interest rate, which can reduce your monthly payments.
When consolidating debt, the main goal is to streamline your payments and make them easier to manage. Getting a lower rate or payment is an added bonus.
Even so, it might not be the right time for you to consider debt consolidation right now. Keep in mind that several factors go into getting a lower rate or better terms and you should evaluate these before submitting an application. Improving these areas first can mean a lower rate, a longer loan term and better approval odds.
- Your personal credit score
- Your business credit score
- Your personal finances: Could you ask for a raise at work, or find another source of income?
- Your business finances: Can you create new revenue streams or reduce your overhead?
The Pros and Cons
If consolidating your debt sounds right, it’s smart to consider the pros and cons to see whether it could really help you meet your business’s goals.
If you’re currently carrying high-cost business debts such as credit cards or merchant cash advances, you may be able to get a new loan at a lower rate. This could mean lower monthly payments and less interest paid over the life of the loan. That can make it easier to manage cash flow and day-to-day finances.
Small business loans can be complicated - you need to juggle many priorities. But having one loan can streamline this. You won’t have several minimum payments, due dates, or interest rates to track. Instead, you’ll have one loan and one monthly payment. With fewer things to track and stress about, you’ll be able to spend more time and energy on growing your business.
Paying your bills on time is one of the most important factors in business credit scoring, but if you’re juggling several loans or cash advances it can be easy to miss a payment. Consolidating your debt lets you make one monthly payment, so there’s less of a chance that something will slip through the cracks. This can help improve your business credit score and provide benefits when applying for loans or credit with vendors and suppliers.
There are pitfalls to debt consolidation too.
The rate you get may not be any better than the rates you’re already paying. Several factors determine how your rate is set, including your personal credit score, how much you’re borrowing, your current debts and credit history, the type of loan you’re seeking and the lender. Your new loan may come with a rate that matches or even tops the ones you already have.
Even with a lower rate, depending on your loan term and other factors, you could still end up paying more in total interest over the life of the loan. For example, if you stretch out the length of your loan to get a lower payment, you may end up paying more over time, even with a lower rate. If you’re getting a lower rate or payment, be careful that you’re not stretching the loan term out too long or it could result in a net loss for your business.
If the debt that you have is a result of your business not making enough revenue, then consolidating it may not solve that problem. You’ll still have the same issue: spending more than you make. If you’re having a cash crunch, or if you’re constantly playing catch up, consolidating debt may simply be putting off the inevitable. If you consolidated your debt but then continue to carry high debt on your credit cards or take out cash advances again, you may end up in a worse position than before.
Different Types
If debt consolidation sounds right for you, keep in mind that there are different types. You’ll want to choose one that matches your specific business situation and fits your business needs. Here are some options to consider.
Many small business owners look first to their local bank or credit union. And banks and credit unions generally offer competitive rates and can give longer terms, stretching out repayment for as long as 10 years. Longtime customers may get lower rates, reduced fees or other perks.
Banks generally prefer several years in business, solid revenue and good to excellent credit. If your business is new, has shaky revenues or weak credit, you’ll likely find it hard to qualify for a bank loan.
SBA loans may be worth a look. The agency has several different loan programs, and 7(a) loans can be used to consolidate debt. The maximum loan amount with 7(a) loans is $5 million.
The rates on SBA loans are generally competitive with what you’ll find from a bank, though mostly these loans are aimed at more established businesses with strong credit. They’re not as well-suited for startup businesses or business owners with imperfect credit, though some programs could work in these cases.
Many online lenders offer competitive rates and terms on consolidation loans for small businesses. These may be worth a look if your bank or credit union falls through. Some online lenders may lend up to $500,000 to consolidate debts, and these can often be term loans for up to five years.
Apply for a Consolidation Loan
This process is one that requires careful thought and planning. Take a look at the steps below to get ready.
First, define why you want to consolidate. Do you want a lower rate or payment to free up cash flow, or are you simply looking to simplify your monthly bookkeeping by rolling several loans into one? Your answer will dictate what type of loan you’ll likely pursue.
Before you consolidate your business debt, make sure you understand the costs of your existing loans. To do this, list each of your loans, cards or cash advances, and their balances, rates and terms. Then add up the total debt.
Choosing which debts to consolidate depends on your goals. Borrowers looking for a lower rate typically include their highest-rate debts first. Borrowers trying to free up cash for other business goals often look to their shortest-term loans that come with the highest monthly payments. Borrowers whose main goal is to streamline payments may use one big loan that covers all their debts.
Some lenders include prepayment penalties, which means you’ll be charged a fee for paying off a loan before the end of its term. Look for this penalty on your debt statements or by calling your lender. If you consolidate, you’ll pay them off with your new loan. Consider these when calculating your costs.
Approval requirements are one factor when comparing lenders. If you have good credit and finances, a bank or credit union could be the right choice for you. If you’re looking for a faster process, or if you’ve been turned down by a bank or credit union, an online lender could be a better match. You could have money in a few business days from an online lender.
Compare loans by their annual percentage rate, fees and repayment terms. Be sure to plug in a variety of scenarios into a loan repayment calculator to see your monthly payment and total interest cost. Look beyond your loan’s rate too. Fees and repayment terms can make the difference between a loan you can afford to repay and one that you can’t.
The best time to gather your documents is before you apply for a loan. Documents may include last two years of tax returns, bank statements, and financial statements. Lenders will also look at personal and business credit reports. Some may require a business plan. Having these ready may speed the approval process.
To apply for a consolidation loan, fill out an application and attach any required documents. Make sure you haven’t forgotten anything - an incomplete application can delay the process. Once approved, you’ll be asked for your bank account details so the lender can deposit the funds.
In a consolidation, the new loan pays off the debts included in the arrangement. Remember, though, that you may accrue more interest charges after you apply and before your loan is disbursed, so ask each lender for a payoff amount and a confirmation that your balance is zero. It’s a good idea to check your credit reports about a month after you consolidate. This helps ensure the old accounts report that they’ve been paid off and closed.
About Delancey Street
Delancey Street is a business debt settlement company that helps business owners negotiate with creditors. Our goal is simple: negotiate proposed settlement terms, subject to creditor agreement. Based out of New York, we review business finances and discuss settlement options. We tell you how it is; because your business and future is on the line.
