Business Debt Consolidation: Should You Consider It?
For a business to expand, they sometimes have to take a leap of faith and make a big decision. Most of the time, that decision involves getting a business loan. A business loan is important if you want your business to get better and the right amount of loan can actually transform your business into something more.
However, business loans can also become problematic especially when the amount is too high or it comes with high interest rates.
Like personal debts, businesses can also run into complications when it comes to paying off their business loans. In worse cases, this can lead to adverse effects on the business’ operation. But, on the other side of the coin, businesses recover by consolidating their debts.
What is Debt Consolidation?
In its simplest sense, debt consolidation is gathering all your debt, restructuring them so you can take advantage of lower interest rates, and finally combining everything in a single payment.
How Business Debt Consolidation Works
As we’ve said, startup businesses usually take loans to help fund their operations. Since they don’t really have that much access to a single credit line, they take multiple loans from time to time to continue covering the expenses.
What the businesses know is that they are able to do this while making minimum payments so their margins are still high. But, the problem arises when the loans start to pile up and the next thing you know, you will be having difficulties in trying to manage your multiple loans
Consolidating is easy. A business owner takes a loan to pay off the outstanding smaller loans. When there’s only a single loan left to pay, all the planning becomes simpler and the costs to pay it off actually reduces. You are exchanging patchworks of small payments for one predictable payment.
What’s even better is that a consolidated loan can have an extended repayment period. This means you can stretch out small payments over a longer period of time.
But, before you proceed with debt consolidation, you have to take a few things into consideration first. Take a look at the penalties and other fees you have to pay the current lenders and compare it with the fees you have to pay the new lender. Sometimes, it is a wiser decision to not consolidate your debts if the option doesn’t reduce your costs.
Check the community banks and national banks near you. They are the most common source of debt consolidation schemes. You can also try private companies who offer this service. You can talk to Funding Circle, DealStruck, Fundation, or SmartBiz and see if their consolidation services work for you.
4 Debt Consolidation Options for Businesses
- Fundation. This is perfect for small businesses that are transitioning to becoming larger ones. Fundation is the best company when you need cash-on-hand quickly. You can loan up to $500,000 with an APR of up to 30%. Fundation also requires that you have at least three employees and your business has at least $100,000 in annual revenues.
- DealStruck. If you are a fairly new business, DealStruck is the company for you. They only require that your business runs for a year to get a loan. The catch is that they have higher APRs. It can reach up to 8% and the loan terms can be as long as four years. The loan amount can be between $50,000 to $500,000.
- SmartBiz. Out of the options we have listed here, SmartBiz has the lowest rates — only between 7% to 8%. All you need to have is an established business with a steady income stream. The SBA or Small Business Administration backs up the loans of SmartBiz. Though, you might have to deal with a lot of paperwork. But, who would mind if the interest rates are low?
- Funding Circle. When it comes to business financial assistance, Funding Circle is one of the big names. The loan that you can get can be between $25,000 to $500,000 under an APR of between 8% and 33%. You can choose to have a loan term between one and five years and you usually get the funding within 10 days.
Debt Consolidation & Debt Refinancing: Is There a Difference?
Generally, the two terms are similar in concept and they are sometimes used interchangeably. However, there are a few differences that we need to know. Consolidation means combining multiple loans so it becomes a single new loan. Refinancing, on the other hand, replaces a single loan with a new one that can be paid off with a lower interest rate.
The concepts are very similar but consolidation is mostly for those who want to simplify the payments of their various loans. Refinancing is all about getting a better deal when it comes to loan terms and rates.
Advantages and Disadvantages of Business Debt Consolidation
Like any other business decision, debt consolidation comes with a set of advantages and disadvantages. It’s just a matter of balancing your situation so you are not on the losing end.
It is already given that consolidating your debts makes everything easier to manage. However, there are more advantages you can get:
- You only need to deal with one creditor instead of multiple ones.
- Interest rates can decrease.
- You can look for different repayment terms that can further cut your fixed expenses.
- You are able to save money and use that to expand your business or pay your employees better.
There are a few disadvantages too. A debt consolidation scheme is good if the business is performing quite well when it comes to income streams. But, if your business is already struggling even with the multiple loans you have, consolidation wouldn’t help that much.
This is why it is important that you carefully think about your decisions before making them. Debt consolidation is generally a very good relief for your business to pay off your debts but in some situations, it can become the cause of your business’ closure.
Do your homework and make sure you understand everything there is to debt consolidation before making your next smart move.