How-to Guide: Consolidating Business Debt
Consolidating your business debt into one payment can lower your monthly payments and streamline your budget.
The process consists of taking out a new loan and paying off all of your existing debt.
While it will likely cause a temporary dip in your business credit score, it will allow you to move many different debts into one payment.
The process of consolidating business debt is very similar to doing so with consumer credit cards.
When exploring consolidation options, look for financial institutions that offer lower interest rates than what you are currently paying on existing debt. In addition, you will need to apply for a loan that covers all existing debt on your balance sheet.
So, if a bank offers you a loan of $25,000, this would not work if you had $40,000 in debt. And while some banks may offer a higher ceiling on your potential loan, it still only works if your interest rate is lower than at least the highest rate you currently pay.
There are a number of pros and cons when it comes to business debt consolidation.
Pros of Business Debt Consolidation
Boost Cash Flow: Lower interest rates and one monthly payment make your cash flow more predictable. In addition, you will benefit by paying less interest. This means you’ll have more money for expenses like new product launches, payroll, and more.
Streamline Payments: Working with one financial institution is much better than five. The ability to pull everything into one loan streamlines your capital flow and makes it easier to keep track of your working capital.
Boost Credit Over Time: While you might see a small downturn in your credit after opening a loan, it can pay off in the long run. That’s because the fact that you’ve paid off existing loans will offer positive marks on your credit report.
Cons of Consolidating Your Business Debt
More Interest Over Time: If you are taking out a new term-loan while consolidating, the process of amortization will start over. So, you’ll likely pay more interest over time despite the lower interest rate.
Finding a Lower Rate: If your credit isn’t strong, you may find it difficult to locate a loan with a lower interest rate. There are no guarantees that a bank will offer more favorable terms, especially in economic times where loan standards increase.