Is Debt Consolidation Right for Your Small Business?
Starting a business involves many expenses, such as buying equipment and inventory, staffing, leases, etc. All of these expenses add up quickly and eat into profits. To help with expenses and start their company, many small business owners may rely on multiple funding sources, including taking out different business loans or lines of credit.
While loans are one of the best solutions to turning dreams into reality, they can quickly overwhelm even the most experienced business owner, with varying due dates and building interest.
To solve the headache of having multiple loans, consider debt consolidation as a solution for your small business money woes. Debt consolidation allows you to combine your debts, making them more manageable and lowering interest rates. While debt consolidation is helpful for some business owners, it’s not for everyone. To reduce money headaches, you should consider all solutions, including debt consolidation.
What is Business Debt Consolidation?
Like consolidating personal debt, such as student loans, business debt consolidation is taking some or all of the loans taken out for your small business and merging them into one larger loan. A larger loan may sound like a bad idea, but it can lead to a lower monthly payment in most cases.
By consolidating your business's debt into one loan, you can streamline the payment process and reduce the overall interest of the loans. Debt consolidation is great for small businesses that may have high-interest forms of financing like lines of credit, merchant cash advances, or credit cards. The newer, consolidated loan may have a lower interest rate.
You can only consolidate your debt if you have one or more loans or forms of debt. Otherwise, small businesses with a single loan should look into debt refinancing, which focuses on lowering the payment of an individual loan.
How Does Business Debt Consolidation Work?
Debt refinancing for small businesses is simple: the business owner takes out a single loan that covers the other smaller outstanding loans. Then uses the funds to pay the remaining principal and interest of the small loans, leaving just the larger loan.
By getting a new loan, you can often extend the repayment period, allowing you more time to pay off your debts and more time for your business to grow without the pressure of multiple loans hanging over you.
As with many small business loans, you apply for a new business loan for debt consolidation through any financial institution, such as SouthEast Bank. If approved, you can use the new loan to pay off the others.
Make sure to look up any if there are penalties to paying off your original loans early. Each bank has its own requirements and terms, so be sure to work closely with your chosen bank to understand what you are applying for.
Is There a Difference Between Debt Consolidation and Debt Refinancing?
When looking to resolve your small business loan debt, you might come across both the terms debt consolidation and debt refinancing. Although they look similar on paper, they are two different ways of helping your debt.
As mentioned, debt consolidation is when you pay off two or more smaller loans with a larger loan that you then make payments on to help lower interest rates and avoid having to pay multiple loans at once.
Debt refinancing, on the other hand, is focused on one loan. Like refinancing a house, refinancing business debt is trading one loan for another, usually for a better, lower interest rate, in order to lower monthly payments. Refinancing can help strengthen a business's financial outlook and, eventually, create a thriving business.
Reasons a person might refinance their current loans are:
- Reducing interest rates
- Changing the loan structure
- Freeing up Cash
Those who look into refinancing loans should have good credit scores; the better your credit score, the more likely you are to get a better loan than your current one.
Both debt consolidation and debt refinancing are essential to small business owners struggling to pay off debt, but selecting the right option depends on how many and the type of loans you have.
Advantages of Debt Consolidation
Debt consolidation is one of the best ways to keep your payments in order and ensure you aren’t letting anything get lost in the day-to-day. Running a business is hard work, and having only one loan to pay helps lighten the load and make sure nothing slips through the cracks.
Other advantages of debt consolidation are:
Decrease Interest Rates
If you increase your credit score since applying for your current loans, you may be able to decrease your overall interest rates by consolidating your debts. By getting a lower interest rate, you can save money over the life of the loan.
Increase Credit Score
By consolidating your original loans, you will be paying some or all of them. This means that your credit score can increase once the revolving debt is gone. While there may be a dip in your credit score from applying for the consolidation loans, it will be temporary, and paying off the other loans will help to raise it again.
Pay Off Debt Sooner
Depending on the terms and monthly payment of your new consolidated loan, you might be able to put extra money towards your new monthly payment, allowing you to pay off your loan faster. You can also save money on interest by paying your loan off sooner. On the flip side, if you were struggling to pay off your original debts, getting a new loan will typically increase the loan term, giving you more time to pay it off.
Disadvantages of Debt Consolidation
As a small business owner, you might be ready to jump into debt consolidation considering all of the advantages it has to offer, but before you start applying for new business loans, there are some disadvantages to be wary of, including:
Raise Interest Rates
You may not get a lower interest rate. Many factors go into determining interest rates for loans, including your credit, how much you are borrowing, and how well the business is doing. Not to mention, with a new loan, you might have a longer term, which means paying more interest over the lifetime of the loan.
Added Costs and Fees
The debt consolidation loan might be more expensive than the original loans together. How much the loan may cost you depends on the terms of the loan, how much it’s for, and the interest rate. Many lenders have closing costs, origination fees, and annual fees with new loans. Be sure to talk to your lender to discuss these before agreeing to anything.
Doesn’t Solve Larger Cash-Flow Problems
If you struggle to pay your original loans because of cash flow issues, a new loan won’t patch up anything unless it has a lower interest rate. Even with a lower monthly payment, you may not be bringing in enough money to cover everything. Instead, you may look for a different source of income to help stabilize your business.
How to Decide if Debt Consolidation is Right for Your Business
There’s no one-size-fits-all debt management strategy, but if you are interested in debt consolidation, a few questions can help you decide if it’s the right move for your small business.
Take a close look at your finances and consider the following to determine if debt consolidation is right for you:
What are the goals you want to achieve by consolidating debt?
Are you looking to lower your monthly payment or to make managing payments more streamlined? Understanding why you want to consolidate will help determine if it’s right for you or if you should look into other financing options.
What business debts do you want to consolidate?
Are you interested in consolidating all of them or just a few? How much are they in total? Add up what you want to consolidate and consider if you can get a larger loan for them. A new loan will be easier to obtain if you are in a good financial position. If you are struggling financially or have a lower credit score, debt consolidation may not be the right path. Or, try for a smaller consolidation loan to merge a few loans instead of all of them to help lower interest rates.
What are the current interest rates?
Keep an eye on the current interest rates; if they are higher than your current loans, debt consolidation usually won’t help with lower monthly payments. You could still consolidate to manage your payments easier, but it might not help with cash flow.
Are there any prepayment penalties for any of your loans?
Some lenders may have fees or other penalties for paying off your debt early as you won’t pay off the estimated interest. Be sure to read the fine print of each of your loans and talk to your lender about prepayment before looking into debt consolidation. While it may be worth it to pay the penalties, sometimes it might override the point of a consolidation.
Once you have figured out the goals of consolidating your debts, what loans you want to pay off, and if there are any penalties, you can start researching different lenders and loan options.
When you are looking for a new lender, be sure to read carefully through all of the terms for the new loan to make sure you aren’t getting yourself into something you can’t afford. Be sure to pick a lender that will take the time to help you understand the conditions and terms of your new loan as we do at SouthEast Bank.
Other Options Besides Business Debt Consolidation
Debt consolidation may not be the right option for all businesses. If you aren’t making enough money, for example, it won’t help solve any cash-flow problems, even if the new consolidated loan has a lower payment.
Instead, there are other options to look at before giving up hope on your business. While some of these may sound drastic, they are intended to avoid any asset seizure and defaulting on the loans to prevent future credit damage.
Talk to Your Suppliers
Work with suppliers and vendors to pay back invoices on different dates, allowing you to funnel more money to the business loans. Be kind and understanding when talking to them; they’re business owners too.
Refinancing Your Current Loans
Refinance a loan or two for lower interest rates. As discussed before, refinancing is a good option to help reduce payments on single loans. While it may not be a large amount, as with debt consolidation, the money saved could stave off more serious consequences while business picks up.
Seek Professional Debt Management
Hire a debt counselor or management firm to help you work with your creditor to settle the debt. If you can’t afford to spend more money on a debt counselor, there are some free financing counsel services available to small business owners.
Sell the Business
It’s a hard and tragic step but sometimes necessary if the debt has become too much to handle. Selling your business might be the best option to prevent losing other assets and finally put the debt to rest.
Suppose selling your business won’t cover the costs of your debts, and you are out of options. In that case, you may need to declare bankruptcy, reducing or eliminating the debt through liquidating the business and other assets. It’s best to avoid bankruptcy, if possible, as it will hurt your credit and make it hard to find future loans for other business ventures.
SouthEast Bank Can Help with Debt Consolidation
Are you ready to consolidate your small business debt and help manage payments? You can find a consolidation loan in several places, including credit unions, online lenders, and banks. One of the best places to find help is SouthEast Bank.
We are here to discuss your options and help you understand the process of consolidating your debt. If you realize consolidation isn’t right for you, we can go through the different options to ensure you reduce your debt and create a thriving business. Contact us at one of our convenient Tennessee locations to get started on your debt consolidation loan.
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.