Debt can be a real thorn for small business owners. A Business.org survey discovered that 89% of owners have tapped personal borrowing to keep their companies afloat.
But carrying debt can hold back growth. And it can also wear on an owner’s mental health.
One fix is a debt consolidation loan. Viridiana Ponce, founder of VP Consulting, says putting debts into one loan makes repayment simpler and can free up cash for the business. Her clients feel relief once they have one monthly payment to manage.
If debt is holding your business back, help is out there. Before you start, here is what to know.
With debt consolidation, you take out a new business loan, then use it to pay off several existing business debts. That leaves you with a single loan account to repay.
Why look for a debt consolidation loan? You may get a lower interest rate, which could bring lower monthly payments too. You will also have just one loan and one due date to keep track of.
Consolidating the Right Way
Consolidating debt is no overnight trick. Give yourself plenty of time to explore lenders, negotiate with them, and gather the paperwork they ask for.
A rush to consolidate debt can leave your business worse off than before. Quick money tends to come with higher interest, so fast funding can cost you more. Plus, rushing leaves no time to weigh your options or negotiate.
These steps can help you avoid costly mistakes.
Before you settle on a loan, figure out exactly how much debt you want to consolidate. A debt consolidation calculator can help. Check several financial records to make sure you haven’t missed any debts.
Your accounting system will show what payments you owe on business loans, credit cards, and lines of credit. Have no accounting system? Build a spreadsheet.
Your balance sheet shows you what you owe right now.
Your profit and loss statement will show how much interest you have paid so far.
Cash flow records confirm how much money goes out each month toward paying down debt.
Now pull your credit reports. Can you consolidate with bad credit? It’s possible. But better credit raises your chances of qualifying for an affordable loan.
Review your credit reports to see what lenders will find. Both business credit and personal credit play a role in whether you can qualify for consolidation loans. Fix any credit report mistakes before you apply for a loan.
If you are a sole proprietor or single-member LLC, lenders usually check your personal credit. Experian, Equifax, and TransUnion offer free reports once per week at AnnualCreditReport.com. Look for errors that hurt you and ways to raise your score. Dispute any errors you spot.
Business credit reports are harder to get hold of than personal ones. But if your company has an EIN, it may have business credit reports. You can buy them from Experian. Dun & Bradstreet Credit Insights gives some summaries and alerts at no cost.
Once you have chosen what you want to consolidate, the next step is comparing lenders. Don’t rush. The goal is not just getting cash fast. The goal is finding a lender you can work with, and a loan you can manage.
When you talk to lenders, look past rates to how clearly they answer your questions. If a lender cannot give you key details, that is a big red flag.
What to ask for: the APR (annual percentage rate) and how the lender calculates it. Avoid loans that carry daily rates.
Next, ask what fees come with the loan. There might be an application fee, a prepayment penalty, or other charges.
Also ask what the eligibility requirements are to qualify.
A final check: make sure any lenders you talk to have a current license.
For loans ranging from $5,000 to $250,000, Ponce suggests that you look at Community Development Financial Institutions (CDFIs) rather than banks. These lenders back startups and small firms and often include technical assistance.
Borrowing takes paperwork. Lenders look at your business finances closely, so pull your documents together before you meet with them. It saves time.
Here are some of the documents that lenders may ask for. One is a business plan.
On top of that, lenders might ask for the business financial statements for the last fiscal year and year-to-date.
Next, lenders may ask for business tax returns spanning two to three years.
Two more documents lenders may ask for are six months of bank statements and statements for all loans, credit cards and lines of credit for the same six months.
The next step is to apply. Once you decide on the lender with the best terms, submit your application. Expect plenty of paperwork. The underwriter may ask you for more documents than the ones listed above. In fact, don’t be surprised if that happens. It can take a while.
Once you are approved for a loan, the money may not arrive right away. Depending on the lender, it may take from a few days to a month or longer for your funds to arrive. Keep paying your existing business debts while you wait.
Once you have the loan funds, use them to pay off the debts you chose to consolidate.
Some consolidation lenders send the money straight to your creditors. Find out if this is how your lender does it before you sign. If so, have the account numbers and balances for every debt ready.
If the lender does not handle your payments, pay off each of the debts you consolidated with it yourself as soon as the loan arrives.
A debt consolidation loan comes with upsides. Four are worth noting. First, you may get a lower rate and pay off debt faster.
Second, smaller monthly payments may free cash to grow.
Third, you will have fewer accounts to track.
Last but not least, you will likely feel less stress.
Four downsides come with consolidation loans. One is the amount of time it takes to prepare.
Second is that you likely need good business or personal credit.
Third, better loan terms are not guaranteed.
Finally, lenders may charge fees.
A consolidation loan is just one way to handle business debt. It is worth looking at the options below before you commit to this kind of loan.
Another way to lower monthly bills is refinancing. If you need relief on just one loan, a new loan replaces that debt, possibly at a better rate or lower payment.
Renegotiating may help, too. If just one debt is a burden, reach out to that creditor and ask about changing the terms. Depending on its policies, it may offer a loan modification, deferred payments, or other terms. The creditor has the final say.
If a creditor grants you a payment pause, don’t relax yet. Even during a pause, interest may keep adding up.
If none of these options is enough, there is no shame in asking for help. Just as with personal money troubles, help exists for businesses struggling with debt.
Most of all, don’t do this on your own. A business consultant or finance expert can help you prepare a loan application. They may spot other solutions you had not considered.
Finally, certified nonprofit credit counselors can advise you on how to improve your credit and manage debt. They usually offer free or low-cost help.
About Delancey Street
Delancey Street is a premier, and award winning, business debt settlement company that helps business owners nationwide. Our goal is simple: help you escape debt in a safe and legal manner. Based out of New York, we can help in 49 of 50 states. We tell you how it is; because your business and future is on the line.
