Quick Guide To Small Business Debt Consolidation

It doesn’t matter whether you’re starting your business or you’ve been in business for quite some time; one thing is always certain – cash flow won’t always be your friend. A part of being a business owner is having to deal with unexpected expenses, and if you don’t have enough money lying around – you might need to take out a loan to cover them all.

The thing is, more often than not, you’re going to have to take out several loans at several points in your life, and that means you’re going to have to track several payments and due dates, and that can just become overwhelming. On the bright side of things, there is a way that you can settle that problem. You can turn to debt consolidation.

If that seems like an idea that you might want to explore, we have a quick little guide for you.

What Is A Debt Consolidation?

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To put it simply, debt consolidation is when you take out a new loan to repay the ones that you’ve already taken in the past. Although this might seem similar to refinancing, although it is similar, there are some key differences; but we’ll get to that in just a second.

Essentially, when you take out a loan to consolidate your debts, you turning all of your outstanding debts into a single monthly payment, which is a lot easier to track, and usually comes with a lower interest rate when compared to all the other ones.

The difference between small debt consolidation and personal debt consolidation is pretty much non-existent, so if that is something you were wondering about – now you know.

Is There A Difference Between Consolidation And Refinance?

Although these two are considerably similar in the fact that you’re taking out a new loan to cover the existing one – there are a few key differences.

As we’ve said, when taking out a debt consolidation loan, you are getting a single sum that is covering all of your outstanding debt. With received money, you’d repay your old debt and from that point on – make a single monthly payment to repay the debt consolidation loan.

On the other hand, when you are looking to refinance, you are taking out a loan with a lower interest rate to cover a single loan, not all of them.

What’s fun about this one is that you can take out a refinancing loan to cover your debt consolidation loan – if you manage to find a better (lower) interest rate.

What Do You Need To Secure A Small Business Debt Consolidation Loan?

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While it is true that every lender might have slightly different requirements, most of them will mainly focus on three things – your credit score, annual income, and debt-to-income ratio. Now, you can find more info about the rest of the possible requirements and get an in-depth explanation of the whole process if you want, but if you’re just looking for the outlines and quick notes – here are some.

When it comes to credit score, in most instances, a lender will expect you to have a credit score higher than 650. As you know, the highest possible credit score you can have is 800, so try to strive for a score as high as possible to ensure you get the best interest rates.

When it comes to annual income and debt-to-income ratio, you will have to supply your lender with financial records and documents. Documents like sales projection, tax return info, balance sheets, profit and loss statements, personal and business financial statements, a list of assets and equipment and finally, debt information will all be required.

After submitting all the necessary documentation, the lender will review your case and will determine whether you’re fit for the loan or not.

Pros And Cons Of Small Business Consolidation Loan

As you can see, taking out a small business consolidation loan isn’t too hard. You go to a bank or a lender, submit the necessary documentation and wait to see if you’re approved or not. However, that’s not the hard part. The “hard” part is knowing whether you should take out a loan like this or not.

As is the case with any other thing in life – this one also has its ups and downs, pros or cons, or however else you want to call them. To better understand whether a consolidation loan is good for you or not – we’re going to go over them, one by one.

Pros

1. Streamlining Your Payments

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If you are dealing with several monthly payments, it can be tough to track all the different due dates, interest rates and so on. With a small business consolidation debt, you turn all of those payments into a single payment, making it much easier for you to track the whole thing.

2. Cash

Having proper cash flow is essential for every business, and when taking out a loan like this – you get cash. Now, most of it will go towards repaying the outstanding debts, but if there happens to be some leftover cash, you can use that money to improve your business and invest in things like equipment or new office space.

3. Improved Credit Score

Source: forbes.com

Paying off a credit card or any other debt, in time, will result in an improved credit score. The better you are at repaying loans, the better your credit score will be. And, if you get it high enough – you will never again have to worry about not getting approved for a loan or getting a lower interest rate.

Cons

1. You Might Not Get A Better Interest Rate

Turning multiple monthly payments into one does not guarantee that you will get a better deal. If you were late on your previous payments, your credit score might have gone down, and that could’ve resulted in a consolidation loan with a higher interest rate than all of the previous ones combined.

2. Cash Flow Could Still Be An Issue

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A consolidation loan does not guarantee that you will solve your cash flow problems. If your business is simply not making enough money – this is nothing more than a quick fix for an issue that will not get resolved on its own.

Should You Take Out A Small Business Consolidation Loan?

In conclusion – should you do it? Well, if you can get a better deal and if you don’t have any substantial problems with your business, then yes, by all means. A loan such as this is an excellent option for all small business owners who just need a little nudge in the right direction.

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