If you do currently carry a fair amount of debt and are considering the option of consolidation, it's important to have a firm grasp of precisely what is involved. As with anything, there are pros and cons to business debt consolidation. Knowing as much as you can about the process and how it works, not to mention how it impacts your company will help you to evaluate whether or not this is a good solution for your current debt woes.
In this article, we wanted to explain debt consolidation and then look at what types of businesses might be the best candidates for this particular financial strategy.
In its simplest terms, business debt consolidation is a way to pay off a number of loansdebts by consolidating them all into one single loan. So for instance, if you have several business credit cards, an equipment loan, and/or a short term loan, combining all of these into one larger loan may make a great deal of sense. You get rid of multiple monthly payments, and potentially you get a lower overall interest rate.
Business Debt Consolidation Loan: The Basics
There is a lot to be said for the simplicity of a consolidation loan. Debt management is more effective if you are able to keep better track of when/how much is going out each month. By consolidating your loans into one, the process is significantly streamlined. No more remembering random due dates and thus you minimize the chances of late payments.
How then do you know that you're a good candidate for debt consolidation…Below are a few ways you can tell that it may be time for your company to consolidate loans.
You Have Multiple High-Interest Loans
When applying for a business consolidation loan, odds are you will get a lower rate than what you currently pay on multiple loans. Upon submitting your application the lender will take into consideration things such as time in business, credit score, annual revenue among other factors. The good thing is that if you qualified for the higher rate loans, to begin with, your chances of being approved for a consolidation loan are also pretty good.
You Need a Short-Term Loan to be Extended
With short term loans, the goal is usually to get immediate funds for a project or even just the cash necessary to weather a bad period. However, circumstances can change and thus the business owner may need more time to repay the loan. This is not an uncommon situation. With a debt consolidation loan, there is the possibility of bundling that short term loan with other debts and in the process, gaining more time to repay the original debt in full.
You Have Good Personal Credit
Interest rates for any type of loan are going to be affected by credit score. A lender will check to see that your personal credit is decent. If your score, for example, is higher than 620, you have a much better chance of not only getting the business debt consolidation loan but also of getting that lower interest rate you desire. Below is a breakdown of how credit scores are evaluated:
- Poor: 300-580
- Satisfactory: 581-670
- Good: 671-740
- Excellent: 741-800
- Outstanding: 801-850
If you have above 700 (excellent/), then you are definitely in a great position to get the optimal debt consolidation loan. Again, credit is not the only factor—time in business, company performance, revenue—these also factor in. But a good credit score certainly helps.
And for those with scores below 620, while it may be harder to find a debt consolidation loan, it is still not impossible. It may be a matter of researching alternative and online lenders and finding one that is willing to look at the other variables beyond just the score.
Your Business Revenue is Up
Looking back at your revenue, has it increased consecutively for the past 3 months? If so, then you might be a great candidate for a consolidation loan. Keep in mind, most lenders like to see revenue of at least 25k.
Your Personal Finances Are Looking Good
As the owner, your personal financial history will impact your ability to qualify for a debt consolidation loan. As mentioned, lenders will look at your credit score; they will also look at things such as personal income, reduced debt, the number of dependents you have, your real estate equity as well as an overall household budget.
Length of Time You've Been in Business
Basically, the longer the time you've been in business, the better. And this is true for any loan. The premise is simple: the longer you've been in operation, the better a lender can see how well you manage your finances. Not to mention, the fact that with each passing year in business you are proving your company's worth and its ability to sustain itself. Also, if you've been in business for more than two years, for example, you will most likely have a chance at getting a lower overall interest rate when consolidating debt.
Should You Consider a Business Consolidation Loan?
After evaluating the above factors, where do you stand? If you fall in the positive category for most, then a business consolidation loan may be a great option to help you streamline your current debt and lower your rates. If you fall on the negative side of these issues, you may want to take some time and work on those weaknesses before applying. Get yourself in a stronger position and then lenders will be more inclined to take your debt consolidation loan application seriously.
At First Union, we work with all sorts of companies across numerous industries when it comes to taking multiple debts and centralizing their payments. While yes, personal and business credit score matter, they are not the only deciding factors. We will take the time to understand your company, see where your current finances stand and try and come up with a consolidation game plan that makes sense and one that will help you tremendously in the long run. Call today!