A business debt consolidation loan is required if a borrower has multiple debts. It helps to technically combine and consolidate all existing loans into one. This makes only one monthly repayment amount to one lender instead of numerous ones. It will not directly help you reduce your financial obligations, but it may reduce your monthly repayment amount thus giving you breathing room for your finances. It can also grant longer repayment terms so that repayment amounts will really be at their minimum.
Why Is Debt Consolidation Needed?
This is needed to be able to make financial obligations more manageable. It can also help a company recover or sustain itself especially those who are already on the verge of bankruptcy. Some of the reasons are listed below:
Lower Interest Rates and Fees
This program will lower the overall total of interest rates compared to having multiple loans with different interest rates. Also, if you are not able to fulfill your obligations to your multiple loans, debt consolidation may save you from many surcharges or penalties from multiple missed loan repayments.
In debt consolidation, the repayment term may be longer than your previous loans, making it beneficial in terms of easing financial burdens. Also, when multiple loans are consolidated, your worry of multiple loan terms is also reduced.
Managing One Loan Is Less Stressful
Combining multiple loans into one is much more manageable than having multiple loans with multiple lenders. All aspects will be much easier to handle. Meaning, this will be less strain for the borrower.
Having your debts consolidated means you have lower repayment amounts every month. This could lead to more of your monthly income being freed up and more at your disposal. It can be used for other expenditures. Or, better yet, used for an early pay-off of your existing loan.
Improved Credit Score
If you have sustained a poor credit score even before applying for debt consolidation, this program might help. It can improve it as long as you can sustain stable repayments without any setbacks.
Requirements of Debt Consolidation Loans
Different lenders need different requirements. Before applying for a loan, you may want to improve your credit score and review your credit report. Here is a list of documentation you need before you apply for the loan:
Business and personal credit score
Business and personal credit report
Profit and loss statement
Maintained balance sheets
Business and personal bank statements
Personal and business information
Business debt schedule
Loan numbers and balances
Disadvantages of Debt Consolidation
There might be few drawbacks along with many advantages and benefits.
No Guarantee of Lower Interest Rate
As discussed, loans differ from lender to lender, the same goes with this program. There is no assurance that the interest rate will be the one you are aspiring for.
Payoffs Could Be Expensive
The longer the repayment will be, the higher the probability of a more expensive pay-off. This happens with any type of loan with a long repayment term.
The Difference Between Refinancing and Debt Consolidation
There are two major points of difference between refinancing and debt consolidation:
Refinancing does not mean you need to have multiple loans for it to be applied. It can work on one existing loan.
Debt Consolidation combines all your debt into one loan.
Refinancing usually lowers interest rates, thus lowering your overall payments. This is also true of Debt Consolidation.
Business Debt Consolidation Loan: What Are My Options?
There’s more than one way to consolidate small business debt. Knowing the different loan options available can help you narrow down which type of loan is best. Here are three options for finding small business debt consolidation loans:
1. Apply For A Bank Loan
Banks are most of the time the best choice for debt consolidation. In comparison to other lenders, the term they give can be the longest. This will help lower repayment amounts with competitive interest rates. But to qualify for a bank loan will take a lot of effort and patience. You will also need proof that you have a sustainable business with an income that can make repayments.
2. Try The Small Business Administration
SBA loans are a great alternative. They offer a much lower interest rate and a repayment term that is close to the long-term banks use.
3. Turn To Alternative Lenders For Business Debt Consolidation
Alternative lenders can be found online or in other channels. They can also offer competitive rates and terms but they come with their own terms and conditions. So be sure that you only transact with legitimate lenders. There are times when lenders found through other channels like the internet may not be regulated.
How To Consolidate Debt With A Business Debt Consolidation Loan
If you’re ready to consolidate business debt, it helps to know exactly what steps to take. Here’s a simple checklist you can follow as you navigate the process:
1. Consider Your Goals For Consolidating
What are your objectives in applying for debt consolidation? Be sure the purpose of your debt consolidation is to help in managing debts rather than being a burden.
2. Add Up Your Business Debts
Review your expenditures, including loans. Before venturing into new financial obligations, be sure the cash flow of your company will improve when you make this move.
3. Decide Which Small Business Debts To Consolidate
It is not necessary to consolidate all of your loans. Choose the debts that are the most beneficial to your company, like the debts with the highest interest rates.
4. Check For Prepayment Penalties
If the purpose of debt consolidation is to be free from your other loans, you will need to know what it will cost to pay off your current loans. It must not exceed your target amount to be consolidated and the target amount to be loaned. A miscalculation could lead to serious problems in the future.
5. Decide Where You Want To Look For A Small Business Consolidation Loan
To simply put this, find the most advantageous or beneficial lender in terms of requirements, fees, interest rates and loan terms.
6. Compare Loan Terms Carefully
If you end up with many lenders as a final option, re-compute many times who among them may help you in the long run. Choose who among them can have a high probability for approval to avoid waste of effort and resources.
7. Get Organized
Before acquiring another financial obligation, get yourself together and asses if you are ready for it. Otherwise, prepare for it first in all aspects.
8. Apply For A Business Debt Consolidation Loan
When filling out forms, make sure you have filled out all the required fields correctly and completely. This will maximize time and effort and will avoid a lengthy loan application process.
9. Pay Off Your Old Loans With Your New Loan
Remember that your goal is to be free from any financial obligation. Lowering interest rates or extending loan terms are just short term solutions to help you keep up with all finances. Aim to be free from all debts. Eliminate your loans and other expenditures one step at a time.