How To Consolidate A Business Debt
When you have your own business, whether you are just starting out or have been doing it for years, cash flow isn’t always constant. Sometimes you have to pay unforeseen expenses, make a payroll, or finance new equipment. If you don’t have the cash on hand to afford these things, you might need a business loan.
If you’ve used a few business loans, you could make many different payments to them each month. This means keeping track of the different due dates, interest rates and balances. In addition to running a business, you might feel like loan management is too much to handle. In that case, you might want to look into business debt consolidation.
How does business debt consolidation work?
Business debt consolidation involves taking out a new loan to pay off your existing business loans and debts. By taking out a debt consolidation loan for small businesses, you are transferring a lot of debt in one, simplified monthly payment.
Most often, business debt consolidation works like personal debt consolidation. When looking for a method of business debt consolidation, you should look for loans that offer lower interest rates than what you are currently paying.
You will also want to make sure that the loan covers any unpaid debts that you are trying to consolidate. For example, you can find a loan that covers $ 30,000 in business debt, but your debt could be $ 50,000. If so, you might want to consider a higher loan maximum.
What is the difference between consolidating and refinancing my commercial debt?
Consolidation and refinancing are very similar, but there are a few key differences.
- Refinancing: You take out a loan to replace another, preferably with a lower interest rate and better repayment terms. You don’t necessarily need to have several types of debt to refinance; you can refinance one loan with another.
- Consolidation: This is when you replace many types of debt, including loans, with one loan. When you receive the funds for your new loan, you will pay off your existing debt with this money. Then, you will make a single monthly payment on your new loan.
Although the two are different, you can still handle them the same. For example, if you’ve had a business consolidation loan before, you can refinance it to take advantage of a lower interest rate.
How to get a business debt consolidation loan
While each lender has different requirements, most will look at factors like your income, credit rating, and debt-to-income ratio. Here are several steps you can take to get a business debt consolidation loan:
- Check your credit score: Most lenders will require you to have a score of 650 or higher. However, some lenders specialize in bad credit loans and can work with you if you have a score in the top 500.
- Go through a first consultation: Before you can get a loan, you will need to go through an interview with an underwriting team who will determine if you are a good candidate for debt consolidation.
- Submit financial documents: You will likely need to provide a lender with the following documents:
- Projections of future sales.
- Several years of personal and business income tax returns.
- Personal financial statements.
- A list of all debts.
- A list of all the equipment.
- Multi-year profit and loss accounts and balance sheets.
- Initial review: Once you submit the required documents, the lender will review them. If you are successful, you will receive a prequalification letter outlining the terms of the loan.
- Due diligence: The lender will authenticate the information you provided and research your tax history and any previous legal action. If you pass this part of the process, you will receive a Letter of Commitment.
- Final Steps: Your potential lender will need to check a few documents regarding your original loans and securities and a 12-month payment history.
- Conclude the deal: Once you have completed these steps, you will be able to sign the final documents for your business debt consolidation loan.
Should You Consolidate Your Small Business Debt?
So, is corporate debt consolidation worth it? This method can be a good option if you want to streamline your payments, but you should be aware of the risks before you apply.
Benefits of debt consolidation
- More manageable payments: If you have many different payments, due dates, and interest rates to keep up with, debt consolidation streamlines them. You’ll have better management of your payments, making it easier to keep track of what you owe and when you owe it.
- Improved cash flow: If you get a lower interest rate, you will be able to keep more money in your business each month. This can be used for large purchases, payroll, or other business needs.
- Possible credit score increase: If you can better manage payments with a single loan payment, you will have a better payment history. It can boost your business credit score, and it looks great for lenders. They will be more likely to give you loans and credit offers in the future.
Disadvantages of Debt Consolidation
- A lower interest rate is not guaranteed: If you get a loan with an interest rate no lower than what you are paying now, you could end up paying more than you currently owe. Unless you can get a lower interest rate, business debt consolidation might not be worth it.
- Pay more interest over time: When you take out a new loan to replace old loans, your loan terms start over. This means that you may be spending more time paying off your loan, and you may be paying more total interest in the long run.
- Your cash flow issues might not be resolved: If your business is losing money, a debt consolidation loan will not solve your financial problems. It will be a short term solution without a long term strategic solution.
Best Business Debt Consolidation Options
If you are thinking about consolidating your business debt, you have several choices depending on your situation.
Banks and credit unions are among the most readily available options for obtaining a debt consolidation loan for your business. There is usually a lot of choice and large financial institutions usually target business customers. Large institutions like Chase and Bank of America can be good places to start.
But keep in mind that you generally need to have a strong credit history to qualify for a bank business loan. Depending on the institution, you may need to be in business for a few years and show your business income to be eligible.
Small business management
Small Business Administration (SBA) loans are administered by the federal government specifically for small businesses with financial need. They are designed to help businesses without a big financial cushion grow and be successful.
While banks may want years of established credit, SBA loans are given to businesses that are just starting out or those that are not as financially stable. SBA 7 (a) loans can be used for debt consolidation. To find a lender who issues SBA loans, visit the SBA website.
If you can’t get financing the traditional way, you may want to consider alternative methods, such as peer-to-peer lending companies. Companies like LendingClub and Funding Circle cater to borrowers who need cash but may not have an established operating history to prove they are worthy of it.
Corporate Debt Consolidation FAQs
Will debt consolidation hurt my credit score?
Depending on how you use your debt consolidation loan, it could hurt or improve your credit score. Consolidating your debt can lower your credit utilization rate and diversify your credit history. Simplifying your payments could also make it easier for you to make payments on time. On the other hand, you should avoid depleting the credit that would be released on your other accounts. Adding a new line of credit can also temporarily lower your credit score.
What Qualifications Do I Need For Corporate Debt Consolidation?
In order to qualify for a business debt consolidation loan, lenders will consider the following factors:
- Your credit history and score.
- Whether you are a financially stable candidate.
- Proof of your income to show you can repay the loan.
- Whether you have collateral, like a house or a vehicle
The bottom line
Corporate debt, especially from multiple sources, can be overwhelming. If you are in pain, you may want to consider business debt consolidation.
There are several methods to choose from, and the best one for you depends on the maturity and needs of your business. Before you start applying, be sure to consider all of your options to make sure that a business debt consolidation loan is right for you.