A major obstacle for small businesses is debt. A survey by Business.org revealed 89% of small business owners used personal debt to keep their business operating.
Debt is a growth inhibitor for a business. It’s also a burden on the mental state of the owner.
If the debt is getting in the way, a consolidation loan can help. Consultant Viridiana Ponce with VP Consulting says that consolidating repayment schedules and simplifying repayment improves cash flow.
If your business runs on debt, you have options to consider. Here’s what to know about consolidating your debt before you get started.
Business debt consolidation is a process where you obtain a new business loan to consolidate and repay several existing debts. Balances are rolled over into one loan account. Instead of owing multiple lenders, you would owe the consolidation loan lender.
So why consider consolidating your debt? First, it might result in a lower interest rate. Second, it might lower monthly payments. It may also mean fewer accounts and bills to manage. The fewer debts to repay, the easier it is to stay on top of payments.
How to Start Consolidating Business Debt
The process of consolidating business debt isn’t fast. Ponce says you should take your time.
You may end up in a worse spot if you rush. Fast financing often comes with a higher interest rate, she explains.
Here are the steps to take. Make sure to avoid common mistakes.
Before you shop for a consolidation loan, take stock of how much debt you want to consolidate. Total the debt and see if consolidation is right for you. Use a calculator to decide what loan amount is best. Use these records to estimate how much debt you’re carrying:
- The first is your accounting system (or a spreadsheet if you don’t have a system). This shows how much you owe on loans, credit cards, lines of credit, etc.
- Next is a balance sheet. This helps identify your current outstanding balances.
- Third is a P&L statement. This will show how much you pay in interest.
- The fourth record is cash flow for the month. This will show debt payments monthly.
Next, check your credit. Bad credit doesn’t mean you can’t get a consolidation loan, but a higher score means a better chance of affordable terms.
When looking for a consolidation loan, lenders may check the company’s credit and the owner’s personal credit, so check all the relevant reports for errors. Make sure both are as accurate as possible before you apply.
If you operate a sole proprietorship or single-member LLC, a prospective lender will often look at your personal credit report. It’s important to know what’s in those reports, how to fix errors, and how to download free copies weekly at AnnualCreditReport.com.
Business credit reports are a bit harder to come by, but if you have an Employer Identification Number, you may have a report. Experian sells them, and Dun & Bradstreet Credit Insights offers a free summary plus regular alerts.
Go to a lender where it’s a good fit. Choosing the right lender and loan is more important than the chance to get money, Ponce says.
With all the other factors in play, shop for the best rate from a lender who communicates clearly. It’s not worth taking the risk on a lender that doesn’t seem willing to answer all your questions. Their communication style with you is as important as their rates and terms. A good lender can explain the things you need to know below; if you’re speaking with someone who can’t give you those details, you’re getting a red flag.
- The Annual Percentage Rate, or APR, and how interest on the loan is calculated. Watch out for daily interest rates.
- All fees. These can include application fees, prepayment penalties, and other charges.
- Review the eligibility requirements for qualification.
- Proof the lender has a valid license.
Consider finding a loan of $5,000 to $250,000 through a CDFI (Community Development Financial Institution) instead of a bank, suggests Ponce. They back startups and small businesses, and often provide technical assistance that struggling firms need.
Lenders need to thoroughly vet a business before approving a loan, so gathering up all your paperwork beforehand will save time in the long run. Here are some documents lenders will likely request as they do a deeper dive into the business:
- Business Plan
- Annual and current financial statements
- 2-3 years of tax returns
- 6 months of bank statements
- 6 months of debt statements
Once you know which loan has the best terms, submit the application and get ready for paperwork. A lot of paperwork. The underwriter may also ask for more documents.
Unfortunately, loan approval doesn’t always mean you’ll see the funds the next day or even the next week. Depending on the lender, a business loan can take a few days to a month or longer to hit your bank account. Keep paying off existing debts while you wait.
When you’ve been approved and the funds are in your account, it’s time to put your debt consolidation loan to use. Take the new loan and use it to pay down any remaining debts.
Some lenders may be able to send funds straight to your creditors. Ask about this before you apply. If that’s an option, make sure you have your account numbers ready.
Whether Debt Consolidation Is Right for You
If you do it properly, and do it carefully, consolidating your debt can be a real lifesaver.
Depending on your situation, you may even be able to pay off your debt faster.
- Lower payments can free up cash to grow the business.
- Fewer accounts, fewer payments to manage.
- Stress relief from the pressure of multiple debts.
- A lot of time goes into preparing the application.
- It’s not guaranteed you’ll get a better deal.
- There could be fees attached.
Weigh Your Options
Before seeking a loan, weigh your options.
If you have just one loan that’s giving you trouble, there’s another option to consider. You can take on a new loan to repay the old debt. You may be able to get a lower rate or payment by refinancing.
If cash flow has hit a dry patch, restructuring the debt you’re already carrying can be a help. Call the creditor most burdening your budget, and ask for help. Depending on the creditor’s policies, they may be able to offer a loan modification, deferred payments, or a chance to alter your terms.
Don’t forget about any interest that might keep accruing while you have a pause on payments.
Just as individuals have places to turn when they’re behind on their bills, there are also places where struggling businesses can seek help.
Ponce suggests searching for a business consultant to help prepare for a loan. They can also offer other solutions, she adds.
Nonprofit certified credit counselors are available to work with you for free or a low fee. Credit counseling agencies can give advice on handling credit and debt.
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.
