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How To Consolidate Small Business Liabilities

Cash flow in small businesses is not always consistent, whether it’s a startup or you have been in it for a few years.

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You always need to have the money to pay for expected and unexpected expenses irrespective of the cash flow. Things like employee payrolls and investing in new equipment cannot wait. In such cases, business loans are the best way out.

But in case you have procured multiple business loans, that means you will have to pay for them individually, remember the installment amount, due dates, etc. If you think handling all the different loans is becoming too much for you, then choosing suitable debt consolidation loans for your small business can help ease your hassles.

Debt consolidation can be a critical requirement in times of emergency, or unprecedented economic meltdowns like the one brought about by the COVID-19 pandemic when countless small businesses needed financial assistance to tackle the burden of pending loans that were earlier affordable. Debt consolidation loans were among the most searched-for loans in August 2020 during the pandemic outbreak in the USA, with almost 45,600 average searches per month. (Source)

The Business Debt Consolidation Process

As the name suggests, the debt consolidation loan is a type of loan that helps to pay off all your debts. The main aim behind this loan is to converge all your debts to one loan or account, to have only one streamlined monthly payment.

  • However, before taking the consolidation loan, make sure that you are getting it at the lowest interest rate. Else, you will end up paying a lot more.
  • All your loans are getting covered from the consolidation loan, or it will be of no use.

Consolidations Loan vs. Refinancing

Often, people get confused between consolidation loans and refinancing. Even though they are quite similar, they are different too.

  • For refinancing, you will take one loan at a lower interest rate to repay the other. You will not need to have different debts for this one.
  • The main aim behind a consolidation loan is to take a loan at a lower interest rate to pay off all the various types of debts that you have taken previously. By doing so, you will pay only one monthly installment and save yourself from the hassles involved with different loans.

If you have already taken up refinancing or consolidation, you can opt for them again at a lower interest rate.

Factors That Help You Get A Business Debt Consolidation Loan

Like any other loan, the lenders for business consolidation also consider certain factors before the lending happens. They will check your income, credit score, and various other things before approving. The factors that will help you with a consolidation loan are:

  • Credit score- Most lenders prefer to give loans to people having a credit score of 650 or higher. The credit score shows the past payment credibility of the loan receiver, including whether they repay on time, the number of loan accounts they have, etc.
  • Initial consultation- Before getting a loan, it’s essential to go through an interview process with the underwriting team. The interview is a major determinant in deciding about the loan approval.
  • Documentation- Now, this is the time to submit all your documents like future sales projections, tax returns, financial statements, balance sheets, etc., to the lender.
  • Review- after submission, they will initially review all the documents, and if that comes out positive- you will receive a prequalification letter with all the loan terms outlined there.
  • Due diligence- Next is the authentication process. The lender will check your background depending on the information you provided. If you pass this check, they will quickly send you the commitment letter.
  • Final steps- Once your lender is convinced about all your loan documents, they will sign the business consolidation loan agreement letter.

So, before applying, ensure that you have all the documents ready. And never give false information to the lenders, or your loan application will be rejected during the background check.

Opting For A Business Consolidation Loan

The concept of a business consolidation loan seems attractive and hassle-free. You will be able to streamline your loan payments in one place, that too at a lower interest rate. But is it really worth it? Let’s find out.

  • Managing various payments can involve a lot of hassles. You will need to remember lots of due dates, interest rates, balance, etc. Debt consolidation loans make the whole task a lot easier. All your payments will be in one account.
  • Who does not want to pay a lower interest rate for their loans? The consolidation loans usually come at a lesser interest rate, which means you will be able to save more and maintain the cash flow in your business.
  • As you will manage your cash flow better with only one loan account, it will increase your credit score- no more failing due dates. It will also increase your credit amount and the possibility of getting a loan in the future.

In light of what we have mentioned here, it is must be noted that most lenders need 660 as the lowest credit score, and debt-to-income (DTI) ratio less than 45%, to be eligible for procuring a loan. Credit scores lesser than 660 mean an exorbitantly high interest rate, which makes it financially pointless to take the loan. In case of bad credit, an origination fee between 1% and 5% is likely to be charged along with interest rates ranging between 29.95% and 35.99%, or maybe higher. (Source)

Even though there are many benefits of the consolidation loan, you should be aware of certain drawbacks too –

  • There isn’t any guarantee that you will get the loan at a lower rate. If you do not get a loan at a low rate, you might end up paying a lot more in the long run. So before opting for the consolidation, you must ensure that it will benefit you in the future.
  • Remember that the consolidation process is taking loans to pay off the old loans. It means that your new loan term will start over again. The total number of years will increase, and you might end up paying a lot more. So ensure that you have got the right calculations before you decide to opt for this one.
  • Consolidation loans might not be able to fix your cash flow issues always. It can be a short-term solution, but it will not handle the issue in the long run.

Conclusion

It is never a great decision to burden yourself with more loans. But, if you are getting the consolidation loan at a lower interest rate, and if it is benefiting you in the long run, only then should you think of opting for it. You have to think about the long-term process, and correctly analyze your requirements, before making an informed decision.

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