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Business debt consolidation can make sense when a small business owner carries multiple forms of debt with multiple creditors and varying payment schedules.
A business owner can use the proceeds from a business debt consolidation loan to pay off multiple existing loans all at once, thereby streamlining the repayment process into one single monthly payment, often at better terms and a lower blended interest rate.
The process of pursuing effective business debt consolidation is relatively straightforward, but it does require careful organization and planning. Let’s take a closer look.
The first step toward pursuing business debt consolidation is to get a clear picture of all outstanding business debts – amounts, lenders, payment schedules, interest rates, maturity dates and prepayment penalties.
Awareness of prepayment penalties is important because these can reduce the benefit of debt consolidation and become a factor in determining the financial usefulness of debt consolidation. This does not, however, diminish the convenience that results from simplifying the repayment process through debt consolidation.
Next, add up the total amount due from all existing loans and calculate the blended annual percentage rate (APR) of the total debt. This blended APR is the blended annualized interest rate – including all fees – that your targeted debt consolidation loan should beat. With your targeted APR in mind, it will soon become time to visit banks and online lenders to find the best business debt consolidation loan.
Bank and SBA Business Debt Consolidation Loans
Business debt consolidation loans can be either secured or unsecured and have varying duration’s, but as a general rule, always pursue a loan length longer than any existing business debt. Traditional banks are a good place to start – as they often offer the best terms, interest rates and duration’s (often exceeding ten years) – but these lenders are strict in their approval process.
Both nationally branded and community banks will take a close look at your credit score, and the revenue profile and trajectory of your business before granting a debt consolidation loan. Next up, a loan guaranteed by the Small Business Association (SBA) can help business owners qualify in instances when they have been rejected by a traditional bank. SBA loans have long duration’s of up to 25 years while offering interest rates as low as 7%.
Online Business Debt Consolidation Loans
There are several online options for those businesses pursuing debt consolidation loans that encounter difficulty in securing lending from traditional banks or the SBA. Funding Circle offers loans of up to $500,000, duration’s of up to five years and interest rates as low as 5.5% with funding often provided within ten days.
Fundation offers loans ranging up to $350,000 with APRs as low as 8% to businesses that generate a minimum of $100,000 in annual revenue. However, with durations of up to four years, loans from both of these lenders don’t offer the flexibility of longer-term bank and SBA loans. Meantime, Smartbiz is an online marketplace for SBA loans of large size (as much as $5 million) that typically come with longer duration’s of 10-25 years and interest rates in the 7%-9% range for those who qualify.
Finally, Lending Club offers business debt consolidation loans of up to $300,000 with term lengths of up to five years and interest rates as low as 6%.
Pros and Cons of Business Debt Consolidation
There are two primary advantages to a business debt consolidation loan – streamlining the repayment process and, ideally, saving money on interest expense. It can be difficult for a business owner to juggle multiple debts with varying due dates while managing cash flow and balancing books. Such a situation can give rise to overlooking or missing payments, simply out of confusion.
One simplified monthly payment to a debt consolidation lender solves that problem, as the proceeds from the debt consolidation loan are simply distributed to existing business creditors. Business owners who receive debt consolidation loans usually don’t even get their hands on the actual funds – the money gets divided up by the debt consolidation lender and goes straight to existing creditors.
The second primary advantage can come in the form of interest expense savings when the APR on the business consolidation loan is lower than the blended APR (taking into account all fees, including prepayment fees) of all existing business debts.
The possible disadvantages of a business debt consolidation loan lay in total interest expense that is to be paid over the life of the loan. Because business debt consolidation loans will be of longer duration, even with the case of a lower blended APR, interest expense will accrue over a longer period of time and can make the consolidation loan more expensive than the existing debt scenario.
While longer terms can allow for the convenience and flexibility of a lower monthly payment, the total cost of capital over the life of the loan could increase as a result of the longer loan term. Furthermore, when existing business debt is consolidated, business debt balances that are paid in full already include interest that has accrued on original loan principals, thereby creating a debt consolidation loan with a principal that includes accrued interest from the previous set of existing loans.
This creates a situation of compounding interest expense on top of previously accrued interest expense, something that may prove the debt consolidation loan financially untenable in relation to the existing debt scenario.
Should I Pursue Business Debt Consolidation?
If you are a business owner with multiple high-interest rate loans, a personal credit score of 700 or higher, (650 or higher if your business’ finances and revenue trajectory are on the upswing) and have been in business for at least one year, there is an excellent chance that you can reap the primary advantages of a business debt consolidation loan.
The convenience of streamlining multiple monthly payments into one single (often lower) monthly payment, in combination with a lower blended APR that results in interest expense savings over the life of the loan, can make business debt consolidation a wise choice. However, examine closely the total interest expense over the life of a debt consolidation loan as compared to the existing debt scenario before taking out the business debt consolidation loan.