Being a small business owner 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 situation, you may wonder 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 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 consolidate all of your existing loans.
Should you consolidate your business debt?
When determining whether debt consolidation is right for your business, weighing the advantages and drawbacks and how they pertain to your situation is important.
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 better rate on your debt. This is especially true for debt at a higher interest rate, like credit card debt. If you can find and qualify for a loan with a lower interest rate, you’ll pay less on your debt over time, saving you significant amounts.
- Lower monthly payment: It’s possible your consolidated loan may have a lower monthly payment than the total monthly payments of your individual small business loans. Some consolidation loans stretch out repayment over a longer repayment period, which brings down the monthly payment amount.
- Streamlining repayment: Consolidating your business debt allows you to go from multiple monthly payments to a single payment. This can help you keep track of your payments more efficiently and avoid missing payments or paying late.
- Possible impact on credit score: A lower interest rate helping your cash flow and the potential to stay current on your loan payments more easily could help your business credit score. Lowering your debt utilization and improving your payment history are 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 but simply moving it to a new place. Your new loan amount will generally be the sum of all the current loans you’re consolidating plus any fees.
- 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 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 small business debt consolidation seems like a good option for you and your business, you have some loan options from a few types of financial institutions:
- Bank loans: Traditional banks and credit unions are some of the most common and most accessible places to get a business consolidation loan. Consider not only the most competitive interest rate but the loan terms, origination fees, type of loan and the lenders’ customer service when making your decision. Check the repayment terms and be aware of prepayment penalties. You may also be able to consolidate with a business line of credit, which can be more flexible than an installment loan.
- 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 starting out over a bank loan. SBA 7(a) loans, in particular, can be used for consolidation.
Are there alternatives to business consolidation loans?
Sometimes, 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 involving liquidating your business. Because of the long-term impacts on both your business finances and likely personal finances too, 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.
If your business is struggling with debt and you’re unsure 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!
