Most small business owners need to take out loans at one time or another to increase their cash flow, fund expansion projects, purchase inventory, address business debt, or cover the cost of monthly or seasonal business expenses. The Federal Reserve reported that close to half of all small business owners in the United States apply for traditional or short-term business loans each year. In addition, they also apply for credit lines and equipment loans.
Business owners who take out multiple loans and other types of funding are often faced with mounting debt, high-interest rates, and hard-to-manage monthly bills. If any of this sounds familiar, this blog post from Balboa Capital is a must-read. It explains how to consolidate business debt to manage your financial obligations.
Understanding debt consolidation loans.
We came up with a sample scenario involving an auto repair shop to help you understand what business debt consolidation is. First, the auto repair shop owner took out a $200,000 business loan with a 60-month payback to build an additional service bay. Soon after that, the owner needed to borrow money to pay bills and the auto shop technicians’ salaries. So, the owner took out a $75,000 short-term business loan with a 12-month payback term.
Once the shop’s new service bay was completed, it needed $80,000 worth of new auto repair equipment. The owner then secured an equipment loan with a 48-month payback term. In summary, the auto shop owner had three loans totaling $355,000, and the three separate monthly loan payments had different interest rates and payment terms.
Realizing the need to reduce debt, simplify accounting tasks, improve cash flow, the repair shop owner decided to consolidate debt. The owner talked to a lender and obtained a debt consolidation loan to do this. This loan bundled all three loans together, so one monthly loan payment was required. In addition, because the owner had a good credit score, the loan had a lower interest rate and a slightly longer payback term.
Make sure it is the right choice.
Before applying for a loan to consolidate your business debt, make sure it is the right choice for your needs. For example, if you have several loans with low-interest rates and do not mind making multiple payments each month, consolidating them into one loan with a higher interest rate would cost more.
Another thing to consider is how much interest you will be paying. You might get a lower interest rate on a debt consolidation loan with a longer-term, but this could result in you having to pay more in interest over the life of the loan.
After examining your business’s financial situation, shop for the lowest rates and best terms if you decide that a debt consolidation loan is a good solution. It is also good to contact the lenders on your shortlist and ask about their business loan fees. Some of the most common fees include origination fees, processing fees, and wire transfer fees. Also, do not forget to ask if they charge penalties for prepaying on your consolidation loan.
Consolidating business debt can lower your monthly loan payments if you have a favorable credit score. For example, if you have a couple of loans and a credit line and have a history of making your payments on time, you most likely have good credit. However, keep in mind that your credit score is only one thing your lender will consider when evaluating your loan application. Other important factors include your time in business, annual revenue, debt-to-income ratio, and collateral.
The application process.
Once you have decided on a lender, it is time to submit your business loan application. Before starting, confirm what is required to complete your application with the lender. In addition to information about you and your small business, you may need to provide bank statements, personal and business tax returns, a business plan, and collateral. After your loan is approved, make your payments promptly so you remain in good standing with your lender and the credit rating agencies. In addition, making loan payments on or before the day they are due each month might give your credit score a boost.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.