Debt Consolidation Loans
Obtaining business debt is a necessary part of growth. It’s normal to take out loans for expansion and other projects, however sometimes those loans pile up and start to become unmanageable. Whether the debt ate up more cash flow than expected or the market took an unexpected downturn or even the investment didn’t produce returns as projected, business debt consolidation loans have become the most frequently used solutions for businesses to stay afloat.
A business debt consolidation loan can help a business’s cash flow for many reasons. Often, a debt consolidation loan will lower the overall monthly payment amount and extend the repayment terms, freeing up more working capital per month. The business also now only has one payment, as opposed to several to keep track of and factor into its bottom line.
Refinancing business debt can happen in several different ways, but the end result should always be more manageable and affordable repayment. Here is a guide to business debt consolidation and the best debt consolidation loans.
What You Need To Know About Debt
Debt is money borrowed from a lender with interest charged. The interest rate often reflects the business’s credit score: the better the score the lower the rate because the business is less of a risk to lend money to.
Refinancing vs Consolidation
Having multiple business loans may or may not be a problem, but consolidating them can certainly make calculating cash flow easier. A business debt consolidation loan is different from refinancing. Refinancing refers to one loan being replaced with a new loan at a lower interest rate. Debt consolidation is multiple loans being consolidated into one loan. The terms are similar, and your debt may be refinanced with lower rates, but in order to consolidate business debt you need to have multiple loans.
Avalanche vs Snowball
There are two methods to paying off debt, referred to as avalanche and snowball methods. Avalanche starts with paying off the debt with the highest interest aggressively while making the minimum payments on all other debts. This saves more money in interest. Snowball refers to paying off debts that are smallest first, regardless of the interest rate, which can have a psychologically motivating effect. If you are able to make more than monthly minimum payments, one of these methods might be able to help you pay off debts faster. However, if you are struggling to make monthly minimum payments, consolidating business debt into lower monthly payments and extending the payment period can help you better manage your cash flow.
Debt is Good
Debt is seen as an intimidating word, but it’s not a bad thing. Debt is used for growth and investing in larger projects. Successfully paying off debt can also build your credit score, allowing you to get loans at better rates down the line. By taking on debt and paying it off, your business is showing lenders that you can be trusted with their money and your own expenses.
Debt and Your Credit Score
Debt will have an effect on your credit score, but it isn’t always bad. Taking out a loan will require a hard pull on your credit, causing it to lower, because inquiries from funders are labeled as a flag that your business needs help because it’s struggling, even when the funding is used for growth. Paying off that debt with no missed payments can help raise your credit score higher than it was before the inquiry by proving that you are a trustworthy lender.
Best Debt Consolidation Loans
The best debt consolidation loan depends on your business’s financial position and projections. Every debt consolidation loan will be different from one business to the next, as every cash flow is different.
If you’re looking for the best debt consolidation loans because you’re missing payments, that might lower your credit score and make it harder to get a lower rate, however you can still consolidate business debt for simpler payments each month.
Business debt consolidation loans can be evaluated by how they rearrange finances or by the lender providing the new loan.
A buyout is the better known type of consolidation where one lender buys-out a business’s existing loans and replaces them with one new loan. Ideally the new loan is at a lower interest rate with a longer payment period, even though the debt will be the same or slightly higher.
For businesses that can’t or don’t want to payoff their other debts early and replace them with a new loan, they can opt for a reverse consolidation. A reverse consolidation avoids the need for refinancing by providing the business with enough money to meet all of their monthly payments, then withdrawing a separate amount that is lower than the amount deposited. As the other debts are paid off, less money is deposited to the business until the only debt remaining is the reverse consolidation. Through this method, the other lenders are not bought out. Some lenders do not allow early payoffs or buyouts and in this case, a reverse consolidation to consolidate business debt is the only option to get control of quicksand debt.
Traditional Bank Loans
If you need the lowest rates and longest terms, a bank loan would be your best option to consolidate business debt.
- Term length: 5-20 years
- Interest rates: Usually under 10%
- Payment frequency: Monthly
Both chain banks and local credit unions can offer a business debt consolidation loan option. While coveted and trustworthy, banks are strict about giving out loans. Borrowers need to be performing well, with more than 1 year in business, a very strong credit score, and strong revenue streams.SBA Loans
Are the second most popular options for consolidating business debt. SBA loans are government guaranteed business loans, backed by the Small Business Administration, where the government guarantees part of the loan, making the loan more affordable and easier to qualify for than most other small business loans.
The guarantee acts as a boost to help you qualify where you might not otherwise have qualified for traditional bank financing by lessening the risk the lender takes on, the lender being either a bank or other direct lender.
- Term length: 7 – 25 years
- Interest rates: Starting at 6.75%
- Payment frequency: Monthly
While easier to qualify for than a bank loan and also offering long terms and low rates, SBA loans are still competitive and only given to premium borrowers. Business debt consolidation loans from the SBA will also require strong credit, strong revenue and decent amount of time in business.
Just below bank loans are online lenders. While offering similar products, online lenders have the potential to offer much higher rates. By accepting lower credit and riskier businesses, the higher rates help mitigate the risk assumed by the lender.
- Term length: 1 – 5 years
- Interest rates: 6% – 30%
- Payment frequency: Monthly
Online lenders not only help businesses who can’t qualify for debt consolidation loans through banks, but they can also provide fast funding, in a matter of days. Business owners in need of quick cash for an emergency or opportunity can get that money nearly immediately, but it does come at a cost of higher rates.
Merchant Cash Advance
The next option for a business debt consolidation loan is a merchant cash advance. Similar to online lending, MCAs offer fast cash through online platforms, but by accepting even lower credit than online lenders, the rates will be even higher.
- Term length: 3 – 18 months
- Buy rates: 18% – 60%
- Payment frequency: Monthly, weekly or daily
Merchant Cash Advances need to be carefully weighed as the high rates can cause more problems than they solve. Buyouts to consolidate debt are common as many business owners accept the easy to obtain cash advances and find they’s taken on more than they can pay. If you qualify for a decent rate, MCAs can help with both buyouts and reverse consolidation programs.
Should Your Business Consolidate Business Debt?
Consolidating business debt may sound like a perfect idea, but when it comes down to what you qualify for, there is still a lot to consider. A lower APR is ideal to cut down on interest, but a longer term might mean you pay more interest over time with this new loan than you would have paying off the other loans normally. If freeing up cash flow is a priority, then long term interest won’t matter as much.
Having additional working capital and one monthly payment is enticing but new interest is an important factor to consider. In addition to potentially paying more interest due to extended terms, buying out your other loans might not save you any interest either. Some lenders require you to pay off the principal amount plus interest no matter what, even if you pay off early. In this case, you are paying interest on interest.
A business debt consolidation loan can help your business, but it also might not. If you took on more than you can repay from the start, refinancing will only continue to buy you time until changes are made to free up cash flow or widen profit margins. A low credit score due to too much debt won’t be beneficial to consolidating, as you won’t get approved for a lower rate, which would be needed to get out of debt. In this case, analyzing all financials would be necessary.
If your current loans are high interest and you can qualify for lower interest rates, such as from improving credit scores or finances overtime, or if you’d like to extend a short term loan, you can be eligible for a more favorable business debt consolidation loan.