Business Loans for Debt Consolidation
It’s not uncommon for small business owners to seek out multiple forms of capital when launching a new business. Whether it is a business line of credit, a small business loan, a business credit card or all three, multiple credit lines helps manage cash flow and run your business.
But at some point it can get to be too much. You may struggle staying on top of multiple loan payments in one month. The interest rates and fees you are paying could outweigh the benefit from the capital you borrowed. It may be time to consolidate your debt.
Shield Funding has been helping small business owners consolidate business loans for more than a decade. Even if you have poor credit we have a program for bad credit business loan consolidation. The process is fast and easy and you can do most of it online.
What Do I Need to Qualify?
Below is a list of the requirements to get approved for business funding with our most basic program. There may be additional factors that are considered, meeting these three requirements though gives you a very high chance of having your application approved.
- At Least 2 Months in Business
- 500 Min. Credit Score
- $8,000 Min. Monthly Revenue
What are the advantages of consolidating your debt?
One of the first reasons that small business owners look into debt consolidation is to ease administrative headaches. If you have to make multiple payments, on multiple forms of debt, managing those payments is time taken away from running your business.
Even if you have set up auto-payments, you have to make sure that there is money in your checking account to cover the payments. With multiple lenders, you might have to worry about your checking account balances three or four days a month. It begins to take a mental toll.
A single consolidated debt repayment schedule relieves all those mental burdens. It can also save you money if you have occasionally been forgetting a payment and incurring late fees.
That is not the only way that debt consolidation can save you money. When you started opening credit, you likely did not receive the best interest rates. Or your debt could have variable interest rates and you are tired of a payment that fluctuates. If you needed cash in a hurry at one point you might have stacked loans. Now you are struggling to manage it all.
With debt consolidation, you combine all your existing debt into one business loan. You can often receive a better interest rate, which can possibly save you money. This is not, however, always the case. Sometimes the only benefit you will see is making your payments more manageable.
Improved cash flow can be a large factor in seeking a debt consolidation loan. With just one payment, budgeting becomes easier. Cash that is freed up can be reinvested into your business.
If lowering your monthly payments is a higher priority than saving money, you can extend the repayment period, too. As a simple example, if you owe $6,000, including fees, and have a three month repayment term, your monthly payments would be $2,000. What if you extended that payment term to twelve months, but add an additional $1,000 fee? Your monthly payment goes down by more than $1,200.
Yes, you will pay more in fees. But freeing up that cash flow could help you avoid borrowing more to grow your business.
Another advantage to a debt consolidation loan, and a time where paying more in fees would definitely be worth it, is it you are facing default on an asset-secured loan. An asset-backed loan is one where you have pledged a large capital asset, whether it is your building, your home, or your business, to secure the loan. If you default, the lender has the right to seize that collateral.
Losing your home or business would be devastating. Seek out debt consolidation to avoid this from happening. Paying more in interest or fees is worth keeping your asset. However, if late and missed payments have already hit your credit report, expect to pay more in interest and fees for a new loan.
Sometimes small business owners have to weigh several considerations when making the best debt consolidation decision for their business. The answer is not as simple as “save money in interest and fees,” and that is not always the best path to take.
Is Debt Consolidation the Same as Business Loan Refinancing?
While the terms are often used interchangeably, debt consolidation is not the same as refinancing. When you refinance you replace an existing small business loan with a new business loan. When you consolidate your debt you are grouping together many loans into one new loan. You will now be making just one payment to one lender.
How to Prepare to Consolidate Your Debt
Before you approach a bank or alternative lender about a debt consolidation you will need to get prepared.
Gather all information about your current business debts. While you should already be tracking everything in a spreadsheet, gather your most recent statements which show your outstanding balances and interest rates. Plug all of this information into a blended interest rate calculator.
A blended interest rate calculator will tell you how much you are paying for all your debt combined. This rate will be helpful when determining if the debt consolidation loan you are offered saves you money in interest or fees.
Check your business loans to see if they have any prepayment penalties. A prepayment penalty in your contract means that if you pay the loan off early you will have to make an additional lump sum payment to the lender.
This is essentially to reimburse them for the profit they will lose out on when they do not receive all their payments. A debt consolidation business loan could still be worthwhile, but you should factor this into your calculations.
Check your credit score. Each of the major credit bureaus must provide you with one credit report yearly, free of charge at the government monitored website annualcreditreport. Knowing what is on it, and your overall score, will tell you where you will likely be able to obtain funding.
Once you have the total amount you owe and the blended interest rate, including any prepayment penalties, you are ready to approach lenders about debt consolidation. So, what are your options?
Traditional Bank Loans for Debt Consolidation
Banks and traditional lenders will approve small business owners for debt consolidation loans, but it can be difficult to qualify. They will only work with borrowers who have excellent credit scores, whose businesses have been operating for at least two years, and who have low debt service ratios.
It can take up to three months, on average, to be approved for a traditional bank loan. Applications require significant documentation, such as bank statements, tax returns, business plans, financial statements, and more, which can take time and money to gather and prepare.
When weighing your options, do not apply for a traditional bank loan if you cannot afford to wait for financing. If you need to reduce and consolidate your monthly payments quickly, consider going elsewhere for your funding needs.
If you think you can qualify and do not need the capital quickly, banks usually offer the lowest interest rates and longer repayment terms, as much repayment time as five years.
SBA Loans for Debt Consolidation
Small Business Administration loans exist to promote the success of small businesses in America. If you are approved for an SBA loan, the government guarantees a portion of it to the lender.
This reduces their risk, so they do not demand as high of a credit score and will lend to less-qualified borrowers than those approved for their traditional bank loans. There are, however, still fairly strict qualifications including time in business of two years and a credit score above 660. The approval process can be just as long as a traditional bank loan, with all the associated downsides.
The terms on an SBA loan range from seven to twenty-five years, and interest rates typically start at 6.75%. They will lend in amounts up to $5 million.
Alternative Lender Loans for Debt Consolidation
Alternative lenders offer debt consolidation business loans to businesses which have only been operating a few months or more. They will lend to borrowers with credit scores as low as 500 with business loans bad credit. Instead of looking at your credit score, they consider your minimum monthly revenues.
Minimum revenues must be above $8,000 to qualify with many alternative lenders. Your interest rates will be higher, which reflects the risk they are taking if you have poor credit. The typical range is between 5% to 45%. Terms are from two months to three years, and they will lend between $5,000 to a million dollars.
Alternative lenders can return a business loan application and approve business funding in as little as a few days. They will also give you flexible repayment schedules. You can make a monthly, bi-weekly, weekly, or even daily payment on your business loan, whatever works best with your cash flow pattern.
Deciding on a Debt Consolidation Loan
Once you have applied and been approved for a debt consolidation loan, you will have to make a decision.
If you applied for and were approved for multiple loans, compare the different terms and rates. Perhaps you would be willing to pay a higher interest rate in exchange for a lower monthly payment. Maybe one has a prepayment penalty and one doesn’t, and you are reasonably confident that you will be able to repay the loan early.
If you only applied with one lender, compare the annual percentage rate or APR that they are offering you to your current blended rate for all your debt. Again, look at prepayment penalties, paperwork incurred costs, or other factors such as the loan’s term.
It can be difficult to analyze and make these decisions on your own. After all, your business’ future could be riding on this choice. Consult a financial advisor, accountant, or trusted business mentor if you are having difficulty making your decision.
What to Do Once the Debt Consolidation Loan is Approved
You applied for, received an offer, and accepted the terms of a debt consolidation loan and now the funds have been disbursed. What now?
Do not forget the original reason that you applied for the small business loan. When a large sum of money is deposited into your bank account it can be tempting to use it for other purposes. Either arrange for your lender to send the funds directly to your existing creditors or immediately pay off those loans yourself.
Set up auto-payments with your new lender so that you never miss a payment. You want to avoid late fees and maintain your good standing with them.
Business loans for consolidation can be an excellent choice for your business, even if they do not save you money in the short-term. If you have been thinking about looking into consolidating your debt, talk to Shield Funding today.