Your business may be accustomed to carrying a fair amount of debt, but managing all the different repayments can be time-consuming and expensive. Merging all the debts into one loan can make life considerably easier and may also reduce your monthly payment. If that sounds too good to be true, it might be. Debt consolidation products come in all shapes and sizes; some might sting you for long repayment terms and heavy origination fees.
What Is a Debt Consolidation Loan?
If your business has multiple debts, loans and credit cards and is struggling to manage the repayments, you can move all of your borrowing into one debt consolidation loan. The idea is that you borrow just enough money to clear your existing debts and make one monthly payment to your debt consolidation lender. There are two types of debt consolidation loans: unsecured and secured. An unsecured loan has no collateral, which means the lender cannot come after your property or assets if you miss repayments. With a secured loan, the debt is held against specific assets, so if you're struggling with payments, your business equipment could be at risk, for example.
Is a Consolidation Loan Right for Your Business?
The advantage of a debt consolidation loan is that it puts all your debts in one place. You have only one payment to keep track of, which simplifies your cash flow. On the downside, you may get stung for fees and charges, and also end up paying a high interest rate if you have poor credit. What's more, some of your existing lenders may charge a prepayment penalty if you pay off a loan before the end of its term. Consolidating debts is worthwhile only if you end up paying less overall. Generally, if the finances and credit profile of your business have improved since you took out your current loans, then it's worth looking into consolidating.
Debt Consolidation Loan Companies
Your primary options are a Small Business Administration loan or a debt consolidation loan from a bank or credit union. SBA loans are a great option, but you'll need a personal credit score of at least 680, a two-year trading record and revenue of at least $100,000. Bank loans are typically easier to qualify for, but the price is a higher interest rate – anywhere from 10 to 40 percent is considered normal. Beware too, of the high origination fees some companies charge for arranging the loan. Shop around and read the small print carefully before you sign anything.
Avoiding Business Debt in the First Place
It can be hard to start or grow your business without a small business loan from a bank, so having debt in some form may be inevitable. But if your debts are digging you into a hole, it's critical that you take steps to control them by following these best practices:
- Check your bank balances regularly and understand your cash flow.
- Create a careful budget to avoid making unnecessary payments.
- Buy only what you can afford, ideally with cash.
- Shop around and compare prices before purchasing any big-ticket items, such as office machinery.
- Negotiate with vendors and suppliers for discounts and payment plans.
- Offer sales and discounts to clear old stock and boost your revenue.
- Ramp up collection efforts if you have old debts.
- Cut up credit cards to avoid the temptation to keep spending.
- Fit Small Business: Small Business Debt Consolidation Loan: When to Consolidate Business Debt
- National Debt Relief: Understanding Small Business Debt Consolidation Loans
- Fundera: How to Eliminate Small Business Debt in 7 Simple Steps
- Federal Trade Commission. "Home Equity Loans and Credit Lines." Accessed Sept 29, 2020.
Jayne Thompson earned an LL.B. in Law and Business Administration from the University of Birmingham and an LL.M. in International Law from the University of East London. She practiced in various “Big Law” firms before launching a career as a business writer. Her articles have appeared on numerous business sites including Typefinder, Women in Business, Startwire and Indeed.com.