Business Loans to Consolidate Debt[yoast-breadcrumb]
Business Loans to Consolidate Debt
If you’re a business owner with multiple debts like business loans or credit cards, consolidating them into one new loan can make managing your debt easier. A business debt consolidation loan lets you roll multiple debts into one new loan, ideally with a lower interest rate and monthly payment. This can free up cash flow to reinvest in your business.
But debt consolidation loans aren’t right for every business. You need to look at the costs and benefits to see if it makes sense for your situation. This article will walk through the pros and cons of business debt consolidation and help you decide if it’s a good option for your company.
How Business Debt Consolidation Works
With a business debt consolidation loan, you take out one new loan large enough to pay off multiple existing debts. This new consolidated loan will have one monthly payment, one interest rate, and one loan term. Here’s a simple example:
- You have 3 credit cards with $5,000 balances each, all charging 25% APR
- You take out a $15,000 consolidation loan at 10% APR to pay off the credit cards
- Instead of 3 payments, you now have 1 monthly loan payment
By rolling multiple debts into one, you simplify repayment. And if the new loan has a lower interest rate, you can potentially save money on interest charges. We’ll dig into the pros and cons next.
Pros of Business Debt Consolidation
Here are some potential benefits of consolidating business debt with a loan:
Simpler debt repayment
Multiple loans and credit cards means multiple monthly payments to keep track of. A consolidation loan combines everything into one monthly payment, which can make your debt much easier to manage.
Lower monthly payments
If you can qualify for a lower interest rate by consolidating, your monthly payment may go down significantly. This frees up cash flow you can reinvest in your business.
Save money on interest
Interest charges are a major cost of carrying debt. If your consolidation loan has a lower rate than your current debts, you can potentially save a lot on interest over the loan term.
Pay off debt faster
You may be able to pay off your debt faster with a consolidation loan if you get a shorter repayment term. Paying down principal faster means saving money on total interest paid.
If you consolidate your debts into a larger loan, you may be able to access extra cash. You can use this cash infusion to invest in equipment, inventory, marketing, or other business needs.
Having fewer open accounts and less overall debt can potentially help improve your business credit scores over time. Just make sure you make your new consolidated loan payments on time.
Cons of Business Debt Consolidation
Debt consolidation loans also come with some drawbacks to consider:
When you pay off credit cards or lines of credit with a consolidation loan, you’ll likely need to close those accounts. This can lower your total available credit and hurt your credit utilization ratio, at least temporarily.
Fees and penalties
Some lenders charge fees for consolidating debt, including origination fees, prepayment penalties, or early termination fees. Read the fine print so you know the true costs.
Higher total interest costs
Even if your interest rate goes down, a longer loan term means you pay more total interest over the life of the loan. Make sure you run the numbers.
If you use a consolidation loan to access extra cash, you are going deeper into debt. More debt means more risk if your business hits a rough patch.
Missed savings opportunities
Putting all your eggs in one basket can be risky. You lose the ability to selectively pay off high rate debts first while making minimum payments on others.
Questions to Ask Before Consolidating Debt
Here are some key questions to think through before taking out a consolidation loan:
Will I get a lower interest rate?
Crunching the numbers is crucial – a higher rate means consolidation doesn’t make sense. Shop around with multiple lenders to see who offers the lowest rate.
How much cash do I need?
Figure out your cash flow needs so you only borrow what you need. Every extra dollar you borrow costs money in interest.
How much can I afford in monthly payments?
Look at your budget to see how much room you have for a new monthly loan payment. Don’t overextend yourself.
What loan term makes sense?
A shorter term means less interest paid but a higher monthly payment. Find the right balance for your budget.
What fees are involved?
Origination fees, prepayment penalties, and other lender fees can eat into any savings from consolidation. Do the math.
What debts should I include?
It may make sense to only consolidate high-rate debts like credit cards and leave fixed-rate loans as is.
Business Debt Consolidation Loan Options
If you decide consolidation is right for your business, you have several options for where to get a loan. Here are some top picks:
Big banks like Chase and Wells Fargo offer business debt consolidation loans with competitive rates but stricter eligibility and underwriting.
Local credit unions often provide the most personalized service and lowest rates, but maximum loan sizes are smaller.
The SBA doesn’t offer consolidation loans directly but guarantees loans made by partner lenders under the 7(a) program.
Non-bank lenders like merchant cash advance companies may offer consolidation of their products but at very high rates.
Improving Your Chances of Approval
Having a solid business credit profile and financial history helps your odds of qualifying for a competitive consolidation loan. Here are some tips that can better your chances of getting approved:
- Pay all business debts on time – lenders will check your payment history
- Lower credit card balances before applying – shows you can manage debt responsibly
- Clean up issues on your business credit reports
- Have a solid business plan – lenders want to see future repayment ability
- Provide collateral like equipment or real estate
- Get a cosigner or guarantor if your credit is limited
The stronger your business looks “on paper”, the better your chances of getting approved for a low-rate consolidation loan.
The Downside of Debt Settlement
Some desperate business owners consider debt settlement as an alternative to consolidation loans. This involves negotiating with creditors to pay a lump sum lower than what you owe to “settle” the debt.
While settlement may seem like an easy way out, it has serious downsides:
- Your credit score will plummet
- You can get sued by creditors
- Any forgiven debt may count as taxable income
- You may still owe taxes and fees even after settlement
Debt settlement should only be considered as an absolute last resort option. Consolidation loans allow you to repay debt in full and are better for your credit.
The Bottom Line
Business debt consolidation can be a smart financial move when done for the right reasons. Lower monthly payments, reduced interest rates, and simplified debt repayment make consolidation attractive for many business owners.
But it’s not a magic bullet – you need to run the numbers to see if consolidation truly saves you money based on your specific situation. Getting a consolidation loan also requires having strong business credit and finances.
Approach consolidation loans carefully, but don’t be afraid to explore your options. With the right lender and loan terms, consolidating your business debt can provide some much-needed financial breathing room.