Getting your small business up and running takes stamina, hard work, and secure funding. If bootstrapping your business isn’t an option, you might seek outside financing in the form of loans.
Although it might be necessary to make your business dream come true, juggling multiple loan or credit card payments can be a burden. Instead, you might apply for business debt consolidation.
What is business debt consolidation?
Small business debt consolidation is the process of combining multiple, smaller loans into one large loan. The large loan pays off the small loans. You will only need to make one loan payment each month instead of many.
Consolidating your loans can help you better manage your debt and cash flow, reduce your interest rate, lower your monthly payment, increase your repayment terms, improve your credit score, and give you breathing room to borrow more money.
However, you shouldn’t think of business debt consolidation as a way to solve all your problems. Consolidation only combines your debt into a big debt—it does not eliminate your liability.
Debt consolidation is one form of business debt relief. But, it isn’t the only form. You can also refinance business debt.
Business debt consolidation vs. refinancing
Some people intermix debt consolidation and refinancing, but there is an important difference.
Business loan refinancing is the process of taking out a new loan with lower interest rates and payment amounts to replace a current loan. Refinancing does not consolidate multiple loans into one loan.
Is business debt consolidation right for you?
Before consolidating your loans, you must assess whether it is the right decision for your circumstances.
First, consider your company’s year-over-year growth. If your business has grown substantially since you obtained the original loans, consolidation might be a good decision for you. And the longer you’ve been in business, the more appealing your consolidation request looks to lenders.
You should also consider whether your personal and business credit scores have improved since you originally look out loans. Improved credit scores show lenders that you’re capable of making timely payments. And, you should determine if your overall business finances have improved.
For some, a business debt consolidation loan isn’t the right choice. If you’re close to paying off one or more loans, you should hold off on consolidating. Going through the consolidation process for a loan that is almost paid off can be more difficult, and you may lose money on interest.
When you consolidate, you might need to offer collateral on the new loan. And, you must pay attention to the terms of the new loan. A bad loan could make it more difficult to get out of debt.
Applying for a small business debt consolidation loan
If you decide to consolidate, you need to apply for a business debt consolidation loan.
To apply, you need to determine which debts you want to consolidate. Do you have small business loans, credit cards, or both? Do you want to consolidate all your debt or just some of your loans? For example, if you have five loans but one of them is almost paid off, you might choose to consolidate four loans.
Next, you will need to examine the terms of your current loans. You might need to pay more in early payoff fees when consolidating. If it will cost you substantially more to consolidate, you might want to reconsider.
Determine which lender you would like to use for the consolidation process. For options specific to small companies, you might look into Small Business Administration (SBA) loans.
Once you’re ready to apply, you will need to gather and organize your documents. You need to know the balance on your current loans to apply, too.
Need a simple way to track your company’s debts? Patriot’s online accounting software lets you easily manage your expenses. And, it’s made for the non-accountant. Get your free trial now!
This is not intended as legal advice; for more information, please click here.