You pinned much of your hopes and dreams on your business, and for the most part, you’ve been successful. After all, 80% of all businesses fail within the first 18 months. If you’ve lasted longer than that, you’ve already beaten the odds.
Then, something changes. Maybe the market that you’ve been servicing suffers a disruption due to a new competitor entering the fray. Maybe the cost of something vital to your business goes way up and you are forced to jack up prices, losing long-time customers along the way. Or maybe, sales drop off and you’re not sure why.
All of a sudden, your once healthy cash flow has dried up and you’re not bringing in the kind of profit you budgeted for. Even as your profits change, your debts can remain the same (or get worse). Your loan payments and lines of credits all need to be paid off at the same rates as before even though your financial picture has changed dramatically.
What do you do? While you have plenty of options, this type of situation often calls for a small business debt consolidation loan. This article will teach you about debt consolidation loans for small businesses while also offering tips on what to look for in a debt consolidation partner.
What is the definition of debt consolidation? What does it entail?
On a basic level, debt consolidation is exactly what it sounds like: through some means, you combine a number of your existing debts (such as loans and lines of credit) into a single, consolidated debt. Each way for individuals to consolidate their debt has its pros and cons.
Balance transfer credit cards, for instance, can be a good way for individuals with relatively small debt loads (usually credit cards) to consolidate. When you do a balance transfer, you open up a new credit card with a low interest rate (ideally an introductory 0% APR period) and use it to pay off your other cards. With the debt consolidated onto a much more forgiving card, you can focus on paying it off while paying less interest overall.
Other individuals might take advantage of financial instruments that they’re already a part of to consolidate their debts. It’s possible to borrow against the equity of your home, your life insurance policy, or even your 401k to consolidate larger amounts of debt quickly. As mentioned before, there important pros and cons to consider.
For individuals and small businesses alike, debt consolidation loans are definitely the most popular form of debt consolidation. When you take out a loan to consolidate your debt, you use the proceeds from the loan to pay off multiple debts at once, essentially rolling them all into the new loan.
While all of these methods of debt consolidation have their benefits, we’re going to focus on debt consolidation loans, because they are easily the most useful form of debt consolidation for most small business owners.
What’s the difference between debt consolidation and debt refinancing?
Many people tend to confuse debt consolidation and debt refinancing, which is understandable. After all, both concepts exist to help people to make their debt easier to deal with, and both entail taking out a new loan. What’s the difference?
Think of refinancing as replacing a loan. When you refinance, you take out a completely new loan that ideally has much a lower interest rate and terms that are far more customer-friendly.
With consolidation, the primary goal is turning many different debts into a single debt. In an optimal situation, you’ll get better terms and pay less in interest, but that’s not the main point.
Debt consolidation and debt refinancing aren’t mutually exclusive; you can do both at the same time. Say you refinance a loan for better interest rates, and then use that loan to pay off multiple different debts, essentially rolling them into the loan. In this case, you’re consolidating as you’re refinancing.
Think of it this way: debt consolidation means turning many debts into a single debt. Debt refinancing, on the other hand, makes a single debt easier to deal with. In the right circumstances, either (or both) could make your debt easier to deal with.
When should you consider small business debt consolidation?
Most people only start to think about debt consolidation when times are tough. They’re struggling to keep up with their bills and can’t keep track of when all of their debt payments are due. Frustrated and overwhelmed, they start to research small business debt consolidation options with an air of desperation.
While this situation is understandable, you have to remember that small business debt consolidation isn’t a decision to make lightly or on a whim. It’s a business decision. When you’re considering your debt consolidation options, you should also consider if debt consolidation is a good long-term business decision in the first place.
There are two common scenarios often experienced by business owners.
In the first, the business owner has decent credit and a history of business success. He or she just took out some short-term loans to cover a few costs that the budget couldn’t cover. Now that the business is out of the woods, the owner wants to consolidate those debts in order to get forgiving interest rates. It’s a smart business decision, and due to the fact that the business owner has good credit, it should be easy to get a debt consolidation loan with good terms from a reputable lender.
Things aren’t quite as rosy in the second scenario. The business owner is struggling with multiple debts that he or she took on out of desperation. Because of poor credit, the terms of those debts aren’t especially forgiving. Unless the business owner’s financial situation changes, the debt consolidation loans he or she qualifies for won’t be all that much better. In this scenario, it makes sense for the business owner to wait until his or her finances and credit score improve before seeking debt consolidation.
In short, don’t just jump into small business debt consolidation just because you’re struggling with your bills. Assess your financial situation and try to figure out if consolidating your debt now makes sense or if it wouldn’t be wiser to wait a while before seeking a loan.
How can a business owner become a better candidate for a debt consolidation loan?
In the scenario we sketched out above, it makes sense for someone with a poor current financial picture to wait on debt consolidation. However, how can that business owner become a better candidate for debt consolidation?
In short, the best advice we can give is for the business owner to improve his or her finances in order to qualify for a better debt consolidation loan. There are multiple ways to achieve this.
Improving both your personal credit score and your business credit will go a long way toward improving your financial outlook as a whole. Your personal credit score improves as you keep up with your payments and free up more credit. Waiting for negative marks against your credit to expire (such as bankruptcies, tax liens, and repossessions) is also wise. Business credit is much the same; keep up with your payments, free up as much of your available credit line as possible, and wait for any negative marks to expire.
Overall, financial health is also important here. Being able to show a positive upward trend in business performance and income, increased equity, reductions in debt, and lower expenses will all show potential debt consolidation lenders that you’re a safe investment. If you’re interested in learning more, read this article about the 7 Mistakes That Could Affect Your Business Creditworthiness.
Lastly, the age of your business is important as well. As we already mentioned, a whopping 80% of businesses fail within the first 18 months. The longer that your business lasts, the more likely it is that you’ll qualify for a decent debt consolidation loan.
Improve your credit, improve your finances, and stay in business. You should then be able to qualify for a much better form of small business debt consolidation.
What’s the difference between secured debt consolidation and unsecured debt consolidation?
If you’re weighing different debt consolidation offers, then you’ve probably run into the terms “secured debt” and “unsecured debt.” What’s the difference?
The difference is collateral. Secured debts require that the borrower put forth some kind of major asset to back the debt up. If the borrower fails to pay off the debt for whatever reason, the lender can legally seize and resell the collateral, making some of its money back.
Unsecured debts, on the other hand, rely on creditworthiness alone. Often called “signature” debts, they require nothing more than the borrower’s signature on a piece of paper with no collateral necessary.
Secured debts sound like the worse deal, but they can often be very attractive to a borrower. Because they’re inherently less risky for lenders, they often come with lower interest rates and terms that are more forgiving. As the amount borrowed gets larger, they’re also much more common, as lenders grow wearier as the amount you ask for increases.
What are the pros of small business debt consolidation?
Small business debt consolidation can make a huge difference to a business that is struggling financially, and to business owners that are juggling multiple debts.
If the stress of managing multiple debts is eating away at you, or if you’ve fallen behind on your payments and are dealing with harassment from multiple creditors, then small business debt consolidation might be necessary. After all, one debt is much easier to deal with than several are.
If you’re struggling to keep up with your payments or your feel as if you’re paying far too much in interest, then small business debt consolidation might be the solution to your problems. While there’s no guarantee, debt consolidation often allows for lower monthly payments and lower interest rates, which both help you get out of debt sooner.
While the above points make small business debt consolidation sound like a no-brainer, some downsides exist as well.
What are the cons of small business debt consolidation?
Before you accept any offer for a small business debt consolidation loan, it’s important that you sit down with your financial planner and do the math. It’s possible that the loan offer that makes financial sense (or so it seems) for your business isn’t always the best long-term solution you can find.
Before you sign anything, compare your interest rates and monthly payments to make sure that you’re paying less in both the short and long term. If you’re lowering monthly payments but dramatically extending the life of your loan, you’re likely going to end up paying much more in interest over time, which may not be the wisest financial move.
You should also scrutinize the fees associated with the loan, often found in the fine print. Even if your interest rates and monthly payments appear to be going down, you don’t want hidden fees to squash your newly obtained financial gains.
Overall, it’s on you to make sure that your debt consolidation loan for your small business does two things: reduce your stress and save you money. The former should take care of itself, as you’ll no longer have to deal with constant harassment from multiple different creditors. The latter is not always so easy to figure out, so it’s vital that you crunch the numbers on interest rates, monthly payments, lifetime payments, and more before you sign anything.
If it all checks out, though, you may have found a solution to your business’s debt problems.