Many small business owners decide to take out loans to help grow their business and it can be a wise financial move for them. Sometimes you need extra cash flow to cover temporary cash flow issues, purchase new equipment, hire additional team members, and more. If you have taken out more than one loan for your business, loan consolidation can help make repaying your debt easier and more affordable.
In simple terms, business debt consolidation takes accounts and payments together and bundles them into one loan payment. It involves combining different loans into one new loan with a monthly payment.
This debt carries a lower interest rate and lower monthly payments because it is combined into one, making it the payback process easier for the borrower because there is only payment and one creditor.
People will use debt consolidation and debt refinancing interchangeably but they are not the same. Refinancing is where you obtain a new loan at a lower interest rate as means of paying off other high interest loans. Consolidation is combining multiple loans into one new loan with one payment. The main goal of debt consolidation is to help make payments more manageable by having one payment instead of multiple.
There are some things to consider determining if debt consolidation is right for you.
You qualify: your personal credit score will impact the rate at which you can get a consolidation loan. A score above 620 is considered good and you will get a lower interest rate.
Interest rates: the new loan should have a lower interest rate otherwise it will not work out in your best interest. Begin by calculating the rate you seek and find the average of the interest rates you have on loans now.
Repayment amounts: the debt consolidation repayment should be less than the total of your current loans.
Improved Business Finances: if you see that your business’s revenue and profit have increased, your chance of qualifying for a low consolidation loan increase.
Your personal finances are in good standing: personal finances matter especially when it comes to debt consolidation. Some of the qualifying improvements in your finances include having increased personal income, increased real estate equity, and reduced personal debt.
There are a few steps you must take to consolidate your business debt.
Take a look at your existing business loans and details including the lender, interest rate, payment schedule, and the maturity date.
Prepayment penalties can be expensive so check that your existing loans incur this fee before you pay them off to consolidate business debt.
Add up all the debt that will be combined into a single loan.
Calculate the APR so you know what kind of interest rate to seek for your debt consolidation loan.
Research and find the best lender that will work for your business.
When doing your research, be sure to shop around for the rates and see if you can get a lower APR with the new loan than what your currently have.
Besides the APR, it is important to consider other factors as well such as the terms and interest rates. Consult with a professional for some advice.
If you want to move forward with a business debt consolidation, be sure to pay off your existing debts.
Business debt consolidation is a great way to pay off your business debt but be sure to weigh your pros and cons. Before you start to apply, review all the options and see if business debt consolidation is right for you.