Consolidating business debt isn’t always for cash-strapped companies. A lot of solid businesses consolidate simply to lower monthly costs, find savings or get better terms. The loan is sometimes used to fund growth rather than shore up sinking sales.
Once interest rates and debt repayments fall, a business can use the extra cash to invest and grow.
If you take out one loan to pay off two or more separate loans then this can be called debt consolidation. With any debt consolidation it is important to note that all the original loans are paid off and just one new loan remains. The new loan will have one interest rate and one repayment schedule. Even though interest rates and payments often are lower when consolidating debt, it’s important to look at the total terms of the loan.
Secured and Unsecured
While consolidating debt may make sense, it is important to get the right loan for the right reasons. The two main types of consolidation loans are secured and unsecured. A secured loan is backed with collateral - property or equipment, for example. These loans usually come from banks and credit unions and come with better rates. If you default and fail to make payments, the lender takes the collateral.
Unlike secured loans, unsecured loans need no collateral and are easier to get. Many are online. But the rates for these loans are higher since the lender takes more risk.
Depending on your personal credit, and that of your business, taking out a personal loan may be a route to consolidation. Such loans are made to individuals, so if the business has poor credit, but you have good personal credit, this may be an option. But mixing company and personal finances is risky. If a business goes bad, personal finances also take a big hit.
A secured personal loan is backed by property. If the business falters, however, the lender may come for a chunk of your personal assets. Choosing this option depends on how healthy your company is and how willing you are to be on the hook for payments should the business go under.
It’s easy to get overwhelmed if your business has multiple debt payments. For example, say your business has three different loans. One is for $3,000 at a 20% interest rate, another is for $4,000 at 23%, and the third is for $6,000 at 25%. Consolidating would combine the $13,000 balance into one loan with a rate which could be similar to the existing rates, but could be a variable rate. You would no longer have three loans to keep track of. Combining debt into one loan makes sense when the rates are lower, the payments drop, or the length of the term is stretched out.
Refinancing Can Save You Money
When refinancing, you’re adjusting the terms of an existing loan. Rather than merging several loans into one, a refinance changes the rate, schedule and terms of one loan. Depending on your business, refinancing can save you money in two basic ways. A longer term means your payments will drop. A lower rate saves money each month and makes the total interest less, since you pay less over time.
In practice, you take out a new loan to replace an existing one. If you have a 10-year business loan at a fixed 10 percent, and market rates fall, a lender may offer you a loan for the balance at a 7.5 percent interest rate. If you qualify and the lender will deal, you can take out the new loan, use the money to pay off the old one and start making lower payments.
Before plunging headlong into refinancing or consolidating debt, be honest with yourself and the business history. If your finances and credit are not improved, you will be unlikely to get a better loan. Taking on new debt, even as consolidation, can make approval more difficult and just make a bad situation worse.
Extra Costs That Go Beyond the Basic Interest Rate
Many factors must be weighed before consolidating or refinancing.
What seems like the best interest rate may not be such a good deal after all. Make sure to compare offers by their Annual Percentage Rate (APR). This is because each loan will have extra costs that go beyond the basic interest rate, and the APR adds these in to give a more realistic yearly cost. A lower interest rate may turn out to be a more expensive loan. The length of the term also makes a big difference in the total cost.
One sneaky charge to watch for when consolidating debt is a prepayment penalty. This is a fee the lender charges you when you pay off a loan early. Some lenders add these fees onto loan contracts. So, even if you get a good rate on a new loan, you may have to fork over a big fee to pay off the original one.
Often lenders add these early payment fees to loans to compensate for the money they lose in interest payments when you don’t hold a loan as long as the term. As long as the prepayment penalty isn’t too steep, a good new loan will save money in the long term. The difference between interest rates may not be enough to compensate for a big prepayment penalty. In that case, it pays to wait it out.
Despite their differences, the overall look of debt consolidation and refinancing can be very similar. There’s not always a clean line between the two, and some businesses even do a bit of both at the same time.
Having loans with many due dates may call for consolidation. With just one new loan, paperwork is slimmed down. Just be sure that the rates on the new loan don’t make it a worse deal. If your APR isn’t so hot, you may also try to refinance the loan.
Changing your debt structure with consolidation or refinancing takes consideration and planning. Because of this, it’s often a good idea to talk with a trusted funding expert who knows your business before you make big changes. Changing around your debt is not a cure-all.
Finding a suitable, affordable loan to pay off multiple loans can smooth out cash flow, simplify your bookkeeping and slim down interest payments.
Renegotiating loan terms is also possible with your lender. In the end, learning to manage debt wisely is essential.
Among the options, the best unsecured small business loan won’t need collateral and will get to your account fast. These are loans to go to if you need cash fast. Be careful to compare lenders and APRs to be sure you’re getting the best deal.
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.
