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Updated on Tuesday, November 27, 2018
Some small business owners are able to forgo any type of financing and solely rely on their company’s earnings to sustain their business. Others require assistance in the form of credit cards, bank loans and other financing to help keep their business afloat. The intent is to repay the borrowed money by the agreed upon terms, but that doesn’t always happen.
Economic shifts, industry changes and other unforeseen circumstances are among the reasons small business owners often find themselves accruing more debt. This leads to them being stressed out and, in many cases, eventually defaulting on loans, which could threaten their business’ livelihood.
Instead of defaulting on your loan and risking losing your business, consider consolidating your debt. Debt consolidation takes you from having multiple creditors with multiple due dates for high-interest bills to having a single monthly payment with a typically reduced interest rate.
What is debt consolidation?
If you have credit card debt, transferring the balances from cards with higher interest rates to one with a lower interest rate can help you save money over the long haul. Debt consolidation loans essentially operate the same way: your loans are combined into one debt that you pay off. Again, the result is one new loan, typically with better terms (a lower interest rate and lower monthly payments).
How to get a debt consolidation loan
The way to get a debt consolidation loan is similar to getting a regular loan. Your business and personal credit ratings, along with the time you’ve been in business and your company’s revenue, will factor into your loan approval and loan terms. The longer you’ve been in business and the better your credit rating, the better deal you’ll probably get.
A debt consolidation company can help you determine the best option for combining your debts with terms that work best for your business. When evaluating the best debt relief company to help your loan consolidation, review its fees, transparency, Better Business Bureau rating and complaint history. Most reputable organizations will have information about their fees and services on their site. For-profit debt management companies generally charge higher fees than nonprofit ones. The National Foundation for Credit Counseling offers counseling to individuals as well as small businesses. You can also reach out to your lenders to see if they can consolidate your loans or call a bank that will. Most lenders will want information on your loans, the number of years you’ve been in business, your credit score and annual revenue when considering you.
Where to get a debt consolidation loan
Funding Circle.Funding Circle offers peer-to-peer financing for small businesses. Your business needs to have been generating revenue for at least two years and the primary business owner needs to have a FICO score of 620 or higher. It takes 10 minutes to apply online.
Rates: 4.99% to 24.90%
Loan terms: 3 months to 120 months
Amount: $25,000 to $500,000
Traditional banks. Banks such as Bank of America, Chase and Capital One offer lending products that can help consolidate your small business debt. Traditional banks typically prefer businesses operate for at least two years and that business owners have a solid credit score. Underwriters will look at your overall credit history when making a consideration.
Loan terms: Vary
SBA 7(a) loans. Let’s be clear: The U.S. Small Business Administration doesn’t lend money directly to borrowers. Instead, it offers guarantees loans approved by its lending partners. SBA loans offer some of the lowest and most favorable terms for borrowers, including its popular 7(a) loan program. The catch is that qualifying can be challenging. The application process can be lengthy and there are stringent requirements. You must have exhausted other financing options to qualify and collateral may be required.
Rates: Maximum of the prime rate plus 4.25% for variable-rate loans. Maximum of 13.5% for fixed-rate loans (as of the date of publishing).
Loan terms: Up to 25 years
Amount: Up to $5 million
Pros and cons of business debt consolidation
Lower interest rate, lower monthly payment, single creditor
Many good loan programs require you to have average credit or better
Credit rating improves because debts are repaid
Not sticking to a payoff plan can leave you worse off than you started
Business debt refinancing vs. debt consolidation
People generally will use debt consolidation and business debt refinancing interchangeably, but they aren’t the same thing. With debt consolidation, you are combining all of your debts into one loan to be repaid. Refinancing doesn’t require you to have multiple debts — you only need one existing loan in order to benefit. That typically means replacing an existing loan with a new one that has a lower interest rate or, perhaps, a longer term.
3 signs debt consolidation is right for your business
Here are three possible scenarios in which you might be best off consolidating your debts:
- Having multiple debtors is becoming too stressful
- When having multiple loans threatens your business’s success
- If a lower interest rate and monthly payment is available
The bottom line
You only want to consolidate your loans if it makes good business sense. And it makes sense if it results in a lower interest rate, lower monthly payments and other terms that will help alleviate stress and allow your business to thrive.
Choose a reputable lending institution that has a history of doing debt consolidation for small businesses. Research the companies, read the reviews and ask questions. Also, read the fine print and ask more questions if need be. Make sure the loan terms are realistic and something you can honor. You have to stick to the plan and avoid accumulating additional debt, which could put you back where you started or or leave you in even worse shape. Free or low-cost credit counseling services are available if you need assistance. The SBA and the National Small Business Association (NSBA) can also provide or direct you to resources to help you.