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How to Qualify for the Best Rates on a Business Debt Consolidation Loan

Getting the Best Rate on a Business Debt Consolidation Loan

If your business is struggling under the weight of high-interest debt, a debt consolidation loan can be a real lifesaver. By rolling multiple debts into one new loan with a lower interest rate, you can reduce your monthly payments and pay off your debts faster. But not all business debt consolidation loans are created equal. The interest rate you qualify for will depend on several factors, including your business’s financial health and credit rating. Here’s what you need to know to get the best possible rate on a business debt consolidation loan.

Do Your Research

First things first – shop around and compare interest rates from several lenders. Every lender uses different criteria to determine rates, so don’t just go with the first offer you get. Online lenders like Kabbage and Fundbox specialize in small business loans and may offer more competitive rates than big banks. But also check with your current bank or credit union to see if they can beat the rates you’ve been quoted elsewhere.

Improve Your Credit Score

One of the biggest factors affecting your interest rate is your business credit score. Lenders view businesses with higher scores as less risky, so they reward them with lower rates. Before applying for a loan, take steps to improve your business credit:

  • Pay all bills on time – late payments can tank your score. Set calendar reminders for due dates if needed.
  • Lower credit utilization – aim for less than 30% of available credit used. Pay down balances on existing cards and loans if possible.
  • Check for errors on your business credit reports – dispute any inaccurate negative info dragging down your score.
  • Become an authorized user on a business partner or spouse’s credit card account to benefit from their good payment history (but avoid jointly applying for new credit right before applying for the consolidation loan).

Even a small improvement in your credit score can mean a lower interest rate, so put in the work.

Strengthen Your Financials

Lenders also look at your business’s financial health when determining loan approval and setting rates. A business with steady revenue, profits, and cash flow poses less risk and earns better loan terms. Some tips:

  • Show consistent revenue/sales over the last 6-12 months. Lenders like to see stability and growth.
  • Highlight any recent big contracts or clients you’ve landed. This demonstrates future revenue potential.
  • Cut unnecessary expenses to improve your profit margins in the months leading up to the loan application. Lenders like to see healthy profits.
  • Have an updated business plan that outlines strategies for continued growth and profitability. This shows lenders you have a plan to pay back the loan.

The stronger your business looks “on paper”, the better the rate you can qualify for.

Provide Collateral

Secured loans that are backed by business assets you pledge as collateral typically have lower interest rates than unsecured loans. The collateral reduces the lender’s risk. Things like real estate, equipment, accounts receivable, inventory, or certificates of deposit can potentially be used for collateral. Just be aware that if you default on the loan, the lender can seize the assets. Make sure to only pledge collateral you could afford to lose.

Know Your Numbers

When applying for a consolidation loan, come armed with numbers that present your business in the best light. Gather:

  • Tax returns – previous years plus current year profit & loss
  • Bank statements – showing steady revenue/income
  • Balance sheets – listing assets that could potentially be used as collateral
  • Accounts receivable/payable – to demonstrate cash flow
  • Credit score documentation – showing your stellar creditworthiness

Being able to provide this financial info quickly shows professionalism and transparency.

Choose the Right Loan Term

Shorter loan terms usually come with lower interest rates, since the lender’s money is at risk for less time. For the lowest rate, choose the shortest term you can afford based on the monthly payments – but don’t overextend yourself. A 5-year term is a good balance for many small businesses. Going longer than 7 years raises rates. Do the math to find the “sweet spot” term length for your budget.

Make a Large Down Payment

The more skin you put in the game, the less risk for the lender. Making a down payment of 25-30% or more can result in a significantly better interest rate. Even a 10-15% down payment helps. Know the lenders’ down payment requirements and come prepared with the maximum amount you can swing. If you need to, look into borrowing from friends/family or business grants and incentives to fund the down payment.

Improve Your Debt-to-Income Ratio

Lenders look at your business’s total monthly debts divided by its monthly income. The higher that ratio, the riskier the loan looks. Paying down debts and lines of credit before applying for the consolidation loan can lower your DTI and qualify you for a better rate. If you have an opportunity to take on new revenue-generating projects before applying, do it – more income means a better DTI.

Negotiate, Negotiate, Negotiate

Interest rates are often negotiable, especially with online lenders that use algorithms to set rates. Be open about the other offers you’ve received, and politely but firmly press the lender to beat the rate. Also ask about discounts for setting up autopay, loyalty discounts if you have an existing account, or rate reductions for a shorter payment term. Bring up anything that highlights why you are an ideal, low-risk borrower. Ask for the best rate they can possibly offer. The worst they can do is say no.

By following the strategies above, you can put yourself in the best position to qualify for the lowest interest rate possible on a business debt consolidation loan. Don’t leave money on the table – a lower rate means big savings and less financial stress as you pay off your debts. Shop around, improve your financial profile, and negotiate hard. With some legwork upfront, you can win big with the best rate on a consolidation loan for your business.

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