Many small business owners need to take out loans from time to time to increase their cash flow, fund expansion, purchase inventory, pay off business debt, or cover the cost of monthly business expenses. The Federal Reserve reported that close to half of all small business owners in the United States apply for traditional or short-term business loans each year. Furthermore, they also apply for credit lines and equipment loans. Business owners who take out multiple loans are often faced with mounting debt, high-interest rates, and increasing monthly bills. This blog post from Union Commercial Capital explains how to consolidate business debt to manage your financial obligations.
How Debt Consolidation Loans Work
Here is an example of a debt consolidation process. First, a restaurant owner took out a $50,000 business loan with a 48 month term to do some renovations on the dining area and kitchen. Later on, the owner needed to borrow money to pay bills and the restaurant employees’ salaries. So, the owner took out a $25,000 short-term business loan with a 12-month payback term.
Once the restaurants renovations were completed, it needed $30,000 worth of new restaurant equipment. The owner then secured an equipment loan with a 36 month payback term. In summary, the restaurant owner had three loans totaling $105,000, and the three separate loan payments had different interest rates and payment terms.
Realizing the need to reduce debt, simplify accounting tasks, and improve cash flow, the restaurant owner decided to consolidate their debt. The owner talked to a lender and obtained a debt consolidation loan to do this. This loan packaged all three loans together, so one loan payment was required. In addition, because the owner had a good credit score, the loan had a lower interest rate and a slightly longer payback term.
Confirm If It's The Right Choice
Before applying for a loan to consolidate your business debt, make sure it is the right choice for your business. For instance, if you have several loans with low-interest rates and do not mind making multiple payments each month, consolidating them into one loan with a higher interest rate wouldn't make sense.
Most often, business debt consolidation works like personal debt consolidation. When looking for a business debt consolidation method, you'll want to look for loans that offer lower interest rates than what you are currently paying.
Getting Started
After examining your business’s financial situation, shop around for the lowest rates and best terms if you decide that a debt consolidation loan is a good solution. Consolidating business debt can lower your monthly loan payments if you have a good credit score. For example, if you have a few loans and a credit line and have a history of making your payments on time, you most likely have good credit. Although, keep in mind that your credit score is only one of the things your funder will consider when evaluating your loan application. Other key factors include your debt-to-income ratio, annual revenue, and time in business.
The Process
Pros of Debt Consolidation
More manageable payments: If you have many different payments, due dates and interest rates to keep track of, debt consolidation streamlines them. You’ll have a better grasp on your payments, making it easier to keep track of what you owe and when you need to pay it off.
Improved cash flow: If you score a lower interest rate, you’ll be able to keep more cash in your business every month. This can go toward important purchases, payroll or expansion, just to name a few.
Possible credit score boost: If you can manage payments better with one loan payment, you’ll have a better payment history. This can boost your business credit score, and it looks great to lenders.
Cons of debt consolidation
Lower interest rate isn’t guaranteed: If you get a loan that doesn’t have a lower interest rate than what you’re paying now, you could end up paying more than what you currently owe. Unless you can secure a lower interest rate, business debt consolidation might not be worth it.
Paying more interest over time: When you take out a new loan to replace old loans, your loan terms start over. That means you may spend more time paying off your loan, and you’ll likely pay more total interest in the long term.
Your cash flow issues might not get resolved: If your business is losing money, a debt consolidation loan won’t solve your financial issues. It’ll be a short-term fix without a long-term strategic solution.
Conclusion
Business debt, especially from multiple sources, can be overwhelming. If you’re dealing with this, you may want to consider business debt consolidation. With Union Commercial Capital, you choose the type of loan or lease you need with the terms that work best for you.
We pair every business owner with a funding specialist to walk you through our entire process, answer all of your questions in a timely manner, and to help you make the best decision for your business. We’ll work with you to size your payment plan, and help you decide what repayments best suit your needs. If you’re ready to consolidate your small business debt, Union Commercial Capital is ready to help.
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