If you’re like many small business owners, you’ve taken on some debt in order to cover the costs of starting or growing your business. According to the Federal Reserve’s latest figures in the 2016 Small Business Credit Survey, 64% of loan applicants sought funds for a new business opportunity or to expand an existing one.
Whether you applied for a small business loan, used business credit cards or even sought out investors, you needed that initial cash infusion to get your business off the ground or to the next level. But what happens with that debt should your business hit a slow period?
While paying back that debt may be going well for you now, it can be wise to consider how you’ll continue making those payments should sales go down and those debt repayments become uncomfortable. If you’d like to get your debt out of the way faster and save money at the same time, debt consolidation could be worth considering.
What Is Debt Consolidation?
It’s pretty much exactly what it sounds like: combining multiple lines of credit into a single account. By consolidating debt, borrowers can frequently get a lower interest rate than on their original loans, making payments more manageable. With more of your monthly payment going toward principal, you could potentially pay off the loan faster. On top of that, instead of making multiple payments, borrowers who consolidate their debts are able to make just a single payment each month, saving them time and simplifying their finances.
Debt consolidation can be particularly helpful if you’ve already fallen behind on payments and have creditors calling you for payment, but getting approved for a business loan that can help you consolidate your debts can become difficult if you’re already behind on payments. Depending on the type of business loan you want to use to consolidate — generally, an installment loan of some sort would be the best option for lowering interest rates and simplifying payments — your personal and business credit scores may be checked and payment history is a major scoring factor in virtually all credit scoring models. (If you don’t know where your scores stand, you can check them for free on Nav.com.)
Are There Downsides?
As with most things in life, there can be downsides to consolidating your business debts. Depending on the terms, a consolidation loan could end up costing you more over the life of the loan by extending the repayment timeline. That’s why it’s important to understand all of the terms you’re being offered before agreeing to any type of loan. This includes considering your interest rates, any fees associated with the new loan and your monthly payment amounts. It’s also wise to seek advice from a financial professional such as your accountant or a Small Business Development Center adviser, who can take a personalized look at your business’s finances. In a nutshell, though, if a consolidating your loans won’t reduce the amount you’re paying each month, it’s probably not a worthwhile solution.
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Debt Consolidation Alternatives
Determining whether debt consolidation is right for you depends on your particular debt and financial situation. For example, if you used a credit card to finance a big chunk of your business expenses, you could consider applying for a balance transfer business credit card with an introductory 0% annual percentage rate. That could help you pay off your debt faster and reduce the amount of interest you pay. Right now, you can get a balance transfer credit card that will get you 0% APR until 2019, an attractive offer for borrowers looking for some debt breathing room.
If you took out a small business loan, you could look at refinancing your debt, though with rising interest rates, chances are you won’t find any cost savings there.
If, however, you have high-interest loans, credit card debt or merchant cash advances that have you feeling overwhelmed, a debt consolidation loan could be a good solution.
Debt Consolidation Loans: What to Look For
When looking to consolidate your business debt, it’s important to find a reputable company that will work on your behalf to negotiate the best terms with your creditors. Talk to several and compare their offerings before making a decision. You may also want to consult a financial adviser to ensure you aren’t overlooking any important considerations.
As you shop your options, you’ll also want to consider whether you want a secured or unsecured consolidation loan. While secured loans often come with better interest rates, they’re backed by a significant asset as collateral. If you’re in serious financial trouble and there’s a possibility you will default on your payments, the difference in interest isn’t going to be worth the potential of losing your home, your business or other valuables. You’re probably better off with an unsecured loan, even at a higher interest rate as long as it’s a savings over your current debt financing.