How to Consolidate Business Debt

how to consolidate business debt

Most small business owners need to take out loans at one time or another to increase their cash flow, fund expansion projects, purchase inventory, and/or cover the cost of monthly or occasional 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 loans each year. In addition, they also apply for credit lines, cash advances, 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 so you can manage your financial obligations in a simple manner.

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. The owner of the auto repair shop took out a $200,000 business loan with a 60-month payback term to build an additional service bay. Soon thereafter, the owner needed to borrow money to pay his bills and his auto shop technicians’ salaries, so he 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, so the owner took out an equipment loan with a 48-month payback term. So, the auto shop owner borrowed $355,000 and made three separate monthly payments, each with a different interest rate and payment term.

Realizing he needed an easier way to repay his debt, simplify his accounting books, and improve his cash flow, the repair shop owner decided to consolidate his debt. To do this, he talked to his lender and obtained a debt consolidation loan. This loan bundled all three of his loans together so he would only have to make one monthly loan payment over a specific period. Because the owner had a good credit score, he was able to obtain a loan with a lower interest rate and a slightly longer payback term.

Make sure it is the right choice.

Before you apply for a debt consolidation loan, you need to make sure it is the right choice for your business. 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 wind up costing more in the end. 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.

Getting started.

If after examining your company’s financial situation, you decide that a debt consolidation loan is a good solution, you need to shop around for the lowest rates and best terms. Do your due diligence and look at banks, credit unions and online lenders. It is also a good idea to contact the lenders on your shortlist and ask them about their business loan fees. Some of the most common fees include origination fees, service/processing fees, and wire transfer fees. Additionally, 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 line of credit and you have a history of making your payments on time, you most likely have good credit. Keep in mind that your credit score is only one thing that your lender will take into consideration when evaluating your loan application. Other important factors will include your time in business, annual revenue, debt-to-income ratio, and collateral.

Once have decided on a lender, you will need to submit your loan application. Prior to starting, confirm with the lender as to what is required in order to complete your application. 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/or collateral. After your loan is approved, make your payments in a timely manner so you remain in good standing with your lender and the credit rating agencies. As you know, making loan payments on or before the day they are due each month can give your credit score a boost.