How to Consolidate and Pay Off Small Business Debt
Owning a business often comes with many ebbs and flows. Sometimes your cash flow hits a snag or unexpected expenses come up suddenly. These situations can leave you strapped for cash, which can make paying your bills difficult.
If you find yourself in this kind of situation, you may be wondering what options you have. Business debt consolidation through a consolidation loan may help you pay off your small business debt.
What is business debt consolidation?
Business debt consolidation involves taking out a loan. Like with personal debt consolidation, this loan allows you to move your other debts to one place. When looking for a business consolidation loan, consider shopping around to find the best interest rate, and find a loan that allows you to move all of your outstanding debt.
Should you consolidate your business debt?
When determining whether debt consolidation is right for your business, it’s important to weigh the advantages and drawbacks and how they pertain to your specific situation.
Pros of business debt consolidation:
- Potential for lower interest rate: One of the most significant advantages of consolidating your business debt is the potential to pay a lower interest rate. If you can find and qualify for a loan with lower interest, you’ll pay less on your debt over time, which can save you significant amounts.
- Streamlining payments: Consolidating your business debt allows you to go from multiple monthly payments to one simple payment. This can help you keep track of your payments more efficiently and avoid missing payments or paying late.
- Possible impact on credit score: The combination of a lower interest rate helping your cash flow and the potential to stay current on your payments more easily could help your business credit score. Lowering your debt utilization and improving your payment history are both important factors in your score.
Cons of business debt consolidation:
- Debt isn’t reduced: One of the common misconceptions about debt consolidation is that it reduces your debt. You’re not actually getting rid of any debt — simply moving it to a new place. The idea of saving is placated on your ability to secure a lower interest rate.
- Doesn’t address the root problem: A business debt consolidation loan is basically like putting a band-aid on the situation. It can be a good short-term solution. But if you’re not addressing your cash flow issues, you’ll be doomed to fall back into the same debt problems. It also may not be enough to resolve your cash flow issues. You also can still rack up debt on other accounts if you haven’t addressed the root problem.
- Possibly paying more over time: When you take out a consolidation loan, you’re starting a new loan term. This loan term may be longer than the term you’re consolidating. As a result, it will take you longer to pay off your debt. This means you could end up paying more in interest over time, even if your interest rate is lower.
How do you get a business consolidation loan?
If business debt consolidation seems like a good option for you and your business, you have some options:
- Bank loans: Banks and credit unions are some of the most common and most accessible places to get a business consolidation loan. Because there are so many to choose from, do your research. Consider not only the most competitive interest rate, but the loan terms, origination fees, and customer service of the lenders when making your decision.
- SBA loans: The Small Business Administration also offers loans to small businesses. The SBA specializes in lending to businesses that are still growing. Therefore, SBA loans may be easier to qualify for if you’re just starting out over a bank loan. SBA 7(a) loans, in particular, can be used for consolidation.
Are there alternatives to business consolidation loans?
In some cases, business consolidation loans may not be the right choice or be enough to help solve your debt problems. If this is the situation your business is in, you may consider some alternatives:
- Refinancing: Refinancing is similar to consolidation but not the same. You can refinance a single loan for a better interest rate, while consolidation involves lumping together multiple loans. This may be a better option than consolidation if one particular loan is giving you trouble or if you find a significantly more favorable interest rate.
- Debt settlement: If you feel like your business needs a little more help, you may want to consider business debt settlement. Settlement involves negotiating with creditors to pay less than you owe. You can negotiate on your own or work with a debt professional to negotiate on your behalf.
Bankruptcy should be your absolute last resort. Chapter 13 and Chapter 11 bankruptcies allow businesses to sell off assets to pay off debts. Chapter 7 bankruptcy is the most extreme form, which involves liquidating your business. Because of the long-term impacts on both your business and likely personal finances, bankruptcy should only be where you turn if you’ve exhausted every other possible option.
The Bottom Line
Business debt consolidation can be an option to help your business get back on track financially. Determining whether it’s the right decision for your business is a decision that should be based on your cash flow, budget, amount of debt, and goals. Consider the pros and cons. And understand that consolidation is only effective if you address why your business was in debt to begin with.
If your business is struggling with debt and you’re not sure where to turn, Tayne Law Group, P.C. is here for you. Our team of debt professionals can help you determine the best path for your business and get you on the road to financial freedom. Call us for a free consultation today at 866-890-7337 or fill out our short contact form and we’ll get in touch!