Business debt consolidation means several or many debts are rolled into a single loan.
The result is one easy payment, ideally at a lower interest rate.
Fees can eat a nice low rate, and stretched-out payments can erode the benefit.
A small business owner often juggles term loans, credit lines, and revenue-based financing. Getting all that debt together on one loan may simplify the situation and could reduce the interest cost.
A debt consolidation loan can have drawbacks, but it also can set a debt-laden company on a better path.
Instead of spreading out payments among several, you make one payment to the debt consolidation account. Managing several accounts, each due on different dates, can be confusing and costly.
Aim to get a rate below the average rate you pay across all accounts. However, the costs of carrying the debt may end up higher if you get a lower rate but pay a lot in fees.
A longer term can lower monthly payments but also could lead to more interest being paid in total. Anthony Booth Jr., the VP of business development at Pursuit, likened it to when people refinance a mortgage and lower monthly payments by extending the life of the loan.
Steady on-time payments may improve a company’s business credit report and can improve your ability to qualify for better rates and terms in the future.
In practice, the new loan can take the place of existing term loans, business credit cards and credit lines by paying those off.
The loan may pay the old loans off in full. You’ll make a single payment instead of juggling multiple bills. The interest rate is usually fixed.
A term loan can be structured as a fixed monthly payment that forces the amount you owe to be reduced by a set date, say five or seven years, instead of an open credit line or card.
You may end up paying lower interest overall by consolidating several cards or lines into one loan.
Consolidating business debt can leave more cash available each month.
You may have to put up collateral to secure a consolidation loan.
Keep in mind that the cost of the total debt could be higher.
Finding new money to pay off old debt might let you weather the current storm, but the business will still be based on debt.
If the interest rate on the debt consolidation loan is lower than the average rate of all the debt combined, your total interest costs could be less.
A debt consolidation loan may lower your monthly payment compared to several accounts that may include high minimums. The difference adds to your free cash every month.
Some debt consolidation loans require collateral as a condition of loan approval. You might be able to get better rates and terms on loans by offering collateral but if your company fails you risk losing the asset you have put up.
Adjusting a debt consolidation loan and lengthening its term to lower a monthly payment can raise the final cost of the loan. Fees can raise what you are being charged.
Six Steps
Here are six steps to help manage your situation.
Write down all the debts owed, outstanding balances, rates and the monthly payments you make for each loan or line. Add the total monthly payments to see what you are currently paying. The figure will provide a benchmark when considering any new offers.
Lenders may want to see a minimum score to consider a loan. Go through the card issuer or credit bureau to see your personal credit report. Around 670 may be a starting point for loan consideration. Note that lenders do not always publish cutoffs or minimum scores they want to see.
Each lender may set different requirements for time open or revenue in order to get a debt consolidation loan. Lenders may want a business to be open for two or more years and generate at least $100,000 in annual revenue.
Pick the type of loan you think you need:
- secured loans require collateral, which puts the asset you pledge up for grabs if your company fails, but may land better rates and terms;
- unsecured loans don’t require collateral but may carry a higher interest rate because of the bigger risk to the lender.
Matching a loan to your needs, aims and goals is paramount. For Booth, the main aim in a consolidation loan is lowering the monthly payment and the interest cost. A longer term cuts the payment but could mean more interest paid in the end. If you have a high-interest credit card balance and get cash through a loan at a lower rate, a shorter-term loan that finishes off the balance can save a lot of money.
Consider a Small Business Administration 7(a) program loan. These programs may have low rates and loan terms of up to 10 years. The approval process, though, can take longer.
Get quotes from three to five lenders you qualify with. Go on lender websites where there is the option to get prequalification. This is usually a soft pull of your credit report. Prequalifying is not a guarantee of rates or terms.
You could also look at community development financial institutions, which are nonprofit, community-based lenders. Booth said they often get money from banks and the government and try to lend where banks might not.
Some loans can have the lender pay debts off itself. With other lenders, borrowers pay off debts they choose. Call your current lenders to find out what the payoff amounts are on your accounts.
When applying, make sure that the information you supply is accurate, including revenue history, cash flow and collateral. Include any documents required. Applying for a loan is usually a hard inquiry on your credit, which lowers your score a little for a short time.
Once you get a loan, look through the documents and loan agreement before signing. Make sure the old debts are actually paid off.
Other Ways to Manage Business Debt
Whether a consolidation loan is not in the cards for you now or you just want to take a look at some other possibilities, know that there are other ways to manage business debt.
Another option is to stick to a strict payoff plan. Pay the accounts with the highest interest first. Writing down all the balances and when each bill is due each month can help.
You might lower your debt faster by pulling in more revenue and cutting costs.
Consider reaching out to the people you owe money and try to work out a solution that works for both parties. Maybe they would be willing to extend the payment terms or reduce the interest rate.
Maybe you won’t qualify for a business loan but your own score makes you a good candidate for a personal loan. Remember to go through a lender that allows the proceeds from its personal loans to be used for business.
When all else fails, seek professional help. A third party can manage debts and come up with a plan tailored to your needs.
The Small Business Administration doesn’t offer consolidation loans itself, but some of the lenders it partners with may let you use an SBA loan to consolidate other 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.
