Is Debt Consolidation Right for You?

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Debt consolidation for business owners

Debt consolidation for your business?

Have you been looking for a way to create room in your budget? Has your business opened multiple forms of credit and you are looking to refinance business debt? Are you forgetting to make payments on time, or struggling to balance your debt and cash flows? 

A debt consolidation business loan could be the answer to your budgetary and cash flow woes. These loan products help small business owners who want to replace the headaches of multiple forms of debt with just one loan, but they’re not without their drawbacks. 

Read on to discover more about debt consolidation loans and determine if one is right for your business.

What is a debt consolidation loan?

A debt consolidation loan combines many loan products into one loan. The debt consolidation loan pays off the balances of existing debt and replaces multiple loan products with one loan and one payment. If you have a combination of; credit card debt, working capital loans, lines of credit, or short-term business loans, a debt consolidation loan could relieve financial and administrative headaches. 

When Would a Debt Consolidation Loan Be Right for Your Business?

There are pros and cons to any loan. When considering a debt consolidation loan, consider the pluses and minuses when deciding if it’s the right choice for your business.

When you need to simplify your finances

Tired of juggling multiple loan payments? Have you missed a few, or paid late, because you couldn’t keep track? Managing multiple open lines of credit takes time away from running your business and leads to an unnecessary administrative burden.

Because it replaces many payments with one payment, debt consolidation can relieve the stress of tracking when payments are due. It can save you from forgetting a payment, paying late, or spending your time moving money between accounts to cover payments. Simplifying finances is one of the biggest benefits to a debt consolidation loan.

When you want to save money

Chances are, you have no idea what you’re paying for your debt right now. A business credit card could have a 22% interest rate, a short-term business loan 15%, and a line of credit could be 18%. Depending on the balances you carry on each of them, your blended interest rate could be much higher than you realize.

The blended interest rate takes the balances on each open form of credit and multiples it by its interest rate to calculate your overall interest rate. A debt consolidation loan, even with a 9% to XX% rate, could save you money overall. 

When you need to lower your monthly debt servicing

When you combine all your existing debt into one debt consolidation loan, it could both save you money on interest but also lower the monthly total you pay to service debt. This could be through a combination of a lower interest rate but also through extending the loan repayment term.

Rolling a credit card payment of $200 a month, a short-term business loan payment of $500 a month, and a payment on a line of credit of $300 a month into a debt consolidation loan payment of $800 will free up cash in your budget. However, since a debt consolidation loan could lower payments by extending your repayment term, be aware that you could be making payments longer.

When you want to pay off debt faster

If the debt consolidation loan saves you money, you can use that savings to pay off your debt sooner. Disciplined small business owners could send the extra $200 savings towards the loan’s principal each month, or whenever possible. A lower monthly payment could make it possible to get out of debt faster. 

When you need a credit score boost

While not a guarantee, a debt consolidation business loan could boost your credit score. Paying off multiple forms of credit could lower debt utilization rates. However, to do that you’d likely have to keep some accounts open and refrain from using them. 

Over time, a debt consolidation loan will boost your credit if you make on-time payments or pay it off faster. 

When Would a Debt Consolidation Loan be a Poor Choice?

There are times when a debt consolidation loan might not be the right choice for your business. 

When you have fewer open credit accounts

A debt consolidation loan is most likely to save you money and hassle when you have multiple open forms of credit. If you’re only balancing a business credit card and short-term loan, it might not be worth it to consolidate this debt. In this case, it’s unlikely a debt consolidation loan would save you money. 

When it doesn’t lower your interest rate

Having multiple open forms of credit likely impacted your credit score negatively. When you apply for a debt consolidation loan the lender could offer an interest rate that’s equal to or higher than existing debt. If the loan wouldn’t have you money, think twice about accepting it.

Under some circumstances, it might still be a good idea. If you truly need to lower your monthly payment and the lender offers an extended repayment term, you could still realize some of the loan’s benefits. 

When you can’t afford the new payment schedule

While a debt consolidation loan could lower your overall monthly debt servicing, some lenders require one monthly payment. It’s possible for that one-time payment to be difficult for your business’ cash flows to cover at once. 

If the new payment amount and schedule would strain your cash flows, look for a lender who offers daily or weekly payments instead. 

When you have to pay upfront fees

Upfront fees help lenders cover the costs of approving and underwriting the loan. These fees could range from an application fee to an underwriting fee, but they’ll raise the loan’s overall cost. When evaluating if the loan will improve your business’s financial condition, don’t forget to include these fees in your calculations. 

For small business owners already struggling with cash flow, it could be difficult to pay this money upfront.

When it hides deeper problems

Take a step back and look at your business from a wider angle. How did you end up in debt in the first place? Continually borrowing could mask deeper business problems – from declining sales to a collections department that isn’t aggressive. 

Your debt load could be a reflection of fundamental business issues, in areas from product offerings to accounts receivable. If a debt consolidation loan would just continue to cover up these problems, instead of buying you the breathing room to fix them, consider other options. 

Choosing a Debt Consolidation Loan

Choosing the right debt consolidation loan is part of finding the right loan for your business. Lenders offer different terms, and one lender could be the better choice. Here are four steps to finding the best debt consolidation lender for your business. 

1. Prioritize why you want to consolidate your debt.

Which of the benefits from the above list matters most to you? Is it lowering your overall monthly debt servicing, or getting a lower interest rate? Order your priorities and use them to evaluate potential lenders.

Perhaps one lender offers a lower interest rate but requires a one-time, monthly payment that you know you’d struggle to meet. Then another lender with a higher interest rate but more frequent payments could be a better fit. 

2. Read the fine print on your existing debt.

Before applying for a debt consolidation loan, gather all the paperwork on your existing debt. It’s not uncommon for some lenders – such as merchant cash advance providers – to put prepayment penalties in their contracts. These penalties lock in their profit.

If any of your existing debt has prepayment penalties, you might not save money from paying it off early.  

3. Determine if you’ll save money when consolidating.

Take the time to do the math. Plug the interest rates and balances of your debt into online calculators and get the blended interest rate. Compare this to the rates offered by debt consolidation lenders. 

If a priority in a debt consolidation loan is to lower your monthly payment, and you plan on doing this by extending the repayment term, how much will the loan increase the total cost of your debt? How much additional interest will you pay over the loan’s lifetime? While doing the math may be time-consuming, you’ll want to have the full picture of the new loan’s short-term and long-term impact on your business before borrowing.

4. Consider the loan terms.

What terms is your debt consolidation lender offering you? Beware of prepayment penalties in their fine print. Slot the new payments into your monthly budget and analyze how they’ll impact your cash flows. 

When picking a debt consolidation lender, talk to several lenders to find the one that best fits your overall debt consolidation goals.

A debt consolidation loan can help small business owners get cash flow issues under control. It can free up room in your budget and give you time to areas to improve your overall business. If you’ve decided that a debt consolidation loan is right for your business, contact Shield Funding today.