During their inception, small businesses need all the help they can get to expand their operations, pursue a new opportunity, or acquire assets. Thus, it’s not surprising that small businesses apply for funding to get their hands on enough working capital to grow. Unfortunately, approximately 70% of small businesses also have outstanding debt.
With owners struggling to repay their loans, debt consolidation for businesses is emerging as a popular solution. However, loan debt is a cause for concern, especially during slow business cycles. Some owners find it difficult to even make minimum repayments. Defaulting on secured and unsecured loans can hurt your credit score, affecting your ability to achieve your business goals.
With secure business loans, you could lose the asset you put up as collateral, like your car, house, or equipment. Accumulating debt on unsecured loans means that lenders aren’t immediately entitled to your assets, but they could eventually take them after a lengthy legal process.
Either way, to run your business successfully, you must find ways to keep up with your payments. In addition to protecting your assets and reputation, you can also strengthen your credit score and credibility with lenders if you want to avail of more loans in the future.
You may apply for several loans as you navigate different opportunities and hardships while running your business. Therefore, you may owe different amounts to providers or have multiple loans with the same lender.
Many business owners prefer consolidating their loans into a single monthly payment, which is more affordable and reduces their overall cost. If you are ready to take control of your finances, business debt consolidation is a great way to streamline your payments.
The Bright Side: Advantages of Debt Consolidation
Single Payment per Month
When dealing with the ups and downs of running a business, you can quickly lose track of different due dates for various loan payments. Missing scheduled payments can quickly get you on your lender’s wrong side!
By consolidating your loans, you now owe a single, cumulated amount scheduled at a set time every month, effectively trading in a messy patchwork of different loan payments into a single amount. As a result, you’ll find it easier to manage your cash flow while keeping up with regular payments.
Decrease Your Overall Cost
You may have agreed to loan terms that tend to put you deeper in debt instead of helping you repay your loans faster. Long-term loans, paid over more extended periods, can ease your cash flow but will lead to higher costs in the long run.
When you owe funds to different lenders, you tend to get hit with overdraft fees or high-interest rates. By consolidating your debt, you are effectively simplifying your payment process, reducing the combined costs of these fees, and negotiating lower interest rates if you can show business growth.
How to Consolidate Debt, the Smart Way!
As a business owner, you want to combine debts with different lenders into a single, affordable loan, payable with fixed monthly payments. When evaluating options for business consolidation, keep in mind that interest rates will depend on the following:
- The amount you want to borrow, which is the combined debt your business owes
- Your loan term
- Your credit rating
Loan consolidation may not be the right move for every business owner, which is why you need to evaluate the terms and conditions of your loans before making changes. For example, you may face higher costs and unexpected fees or penalties that make the consolidation more expensive than it’s worth.
Here are five simple steps to help you decide if loan consolidation is the right option for your business.
Identify Existing Debts
The first step is to evaluate your existing loans and make a note of the following:
- Amount to be paid back
- Rate of interest
- Date of maturity
- Schedule for payments
Check for Charges and Penalties
You may have planned to pay off some of the smaller loans earlier to give you more flexibility when making business decisions. However, some loan providers may have penalties for early repayments, while others only allow you to pay early if you settle the entire loan amount.
When you consolidate your loans, you are left with a larger principal amount, which may be challenging to clear in one instalment if you don’t want to be stuck with recurring payments.
When you enter into a new agreement with a lender to pay back consolidated loan amounts, there is usually an extra charge. This depends on the type of loan you choose and the provider’s terms and conditions and could add to your costs.
Calculate the Consolidated Debt
With loan consolidation, you must roll all your smaller debt amounts into one large loan and make single payments on that accumulated amount. The lender would negotiate new payment conditions for this loan, where you can opt for lower monthly payments paid over a more extended period. While this may seem perfect in the short term, it’s important to remember that even though your monthly cash flow is easier to manage, the interest you pay over that extended period could end up costing you more in the long run.
You can also compare the annual percentage rate of all your individual loans before deciding on your next move. For example, consolidation makes sense if you can replace many high-interest loans with a single low-interest loan. But, if your existing loans have lower annual percentage rates (APR) than the consolidated loan, you are better off sticking to your original payment plans.
Research Options for Business Debt Consolidation
Some of the options for loan debt consolidation are
Traditional Bank Loans
A bank loan is the most popular way to consolidate your business debt. Banks that provide significant working capital have lower interest rates and extended payment terms. However, small businesses often have trouble qualifying for a bank loan, especially for business debt relief. They often look for solid credit scores and healthy revenues before approving loans.
SBA 7(a) Loans
Small Business Administration (SBA) 7(a) loans can be used for many business needs, including debt consolidation. However, SBA has certain restrictions, which state that:
- The original loans must meet SBA 7(a) guidelines.
- The new consolidated loan should have a payment amount of at least 10% less than the existing loan amount.
- The business owner must explain why the current loan is not a reasonable option for them.
It may be a little easier to get an SBA loan for debt consolidation, but they still have a lengthy application process and relatively low chances of qualification.
Alternative Funding
Businesses with previous loans often consolidate their debts with alternative funding companies to help lower their rates and re-evaluate their payment terms.
Companies like FundKite help businesses find customized solutions for their unique requirements. Unlike traditional bank loans, FundKite does not charge high-interest rates. In contrast, they agree to take only a set percentage of your monthly revenue. This way, you don’t have to worry about being able to afford your monthly, weekly, or daily payments during slow business cycles. With FundKite’s rapid approval process and transparent communication, you can confidently consolidate your business debt.
When you apply for business debt consolidation with a bank or financial institution, they will determine if your business has enough income to repay its debt. They assess your Debt Service Coverage Ratio or DSCR, which is calculated by dividing your loan payment by your cash flow. The higher your DSCR, the more confidence the lender has in your ability to pay back your debt. Companies with low DSCRs are considered risky investments for lenders.
Clear Previous Debts
Once you apply for loan consolidation, your new provider will ensure that the loan amount is divided amongst your existing lenders, effectively clearing your accounts with them. From then on, all future payments are made to your new lender.
Conclusion
Debt consolidation may be the perfect solution for some businesses. Yet, for others, it could do more harm than good.
Before consolidating your business debt, carefully evaluate the pros and cons of this move. A new loan with re-negotiated interest rates may lower your monthly expenses but extend your loan payment period, making you pay more interest over a more extended period.
However, business debt consolidation can be the right move if your company is growing.
If you have the steady revenue to pay back the consolidated loan with a fixed interest rate, it provides you with new opportunities to further scale
