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What Is a Business Debt Consolidation Loan?
A business debt consolidation loan is used for the purpose of paying off existing balances and combining multiple forms of debt into a single payment. While tracking multiple payments can quickly become overwhelming, business debt consolidation loans allow for greater convenience - making it easier to pay back what you owe. Ideally, your business debt consolidation loan should cover all of your existing balances. This means that if the total value of all your debt adds up to $100,000, you should take out a debt consolidation loan valued at $100,000 or higher. In some cases, it’s possible to secure your new business debt consolidation loan at a lower interest rate compared to what you’ve been paying. When this happens, you may be able to save or even lower your monthly payments.Types of Business Debt Consolidation Loans
Business debt consolidation loans can take on different forms, but generally, there are two main types.Term loans
Term loans can be offered by banks or alternative lenders, such as online lenders. Term loans are ideal for business debt consolidation because they deposit as a lump sum, allowing you to pay off your existing debts right away. Term loans feature fixed interest rates and repayment terms, which means that your new payment will stay consistent for the duration of the loan.SBA loans
SBA loans are funded by the Small Business Administration and are available through participating banks and some online lenders. SBA loans are another solid option for business debt consolidation since these loans offer some of the lowest rates available on the market.What’s the Difference Between Business Debt Consolidation vs. Refinancing?
At first glance, business debt consolidation and refinancing may seem similar, since they both involve taking out a new loan to pay off existing debt. However, each strategy serves a fundamentally different purpose. The main goal of refinancing is to obtain a lower interest rate and better repayment terms. Refinancing also doesn’t have to involve multiple different types of debt. Often, businesses will refinance one loan with another to secure savings. Business debt consolidation is meant to replace multiple different types of debt with a single new loan. If possible, simultaneously securing a lower interest is an additional advantage, but saving is not the primary goal of debt consolidation. Instead, the focus is on cutting down multiple balances in favor of more simplified repayments.Deciding Whether You Should Consolidate Business Debt
As you decide whether to take out a business debt consolidation loan, it's important to weigh the different pros and cons. Consider the following in order to determine the right move for your business.Benefits of Business Debt Consolidation
Business debt consolidation loans can offer a number of advantages. Take a look at the most common.Manageable payments
By far, the number one reason businesses seek out debt consolidation is for simplified payments. It can be difficult to keep track of multiple due dates and balances. Instead, combining everything into a single new loan allows for greater convenience and makes it easier to stay on top of debt.
Improved cash flow
Replacing multiple balances with a single debt consolidation loan enables you to track your payment schedule more effectively. You’ll be better able to plan ahead and keep your cash flow in check.
Potential savings
If your business’s credit score or other qualifications improved significantly since you last received financing, you may be able to qualify for a lower interest rate on your new debt consolidation loan. Although not the main goal of business loan debt consolidation, it can be an advantageous side effect.
Potential credit score boost
When you merge your debts into a single payment, you’ll be better able to keep track of due dates and ensure you repay on time. This can boost your business credit score, which can help you secure more favorable lending solutions down the line.
Potential earlier payoff date
If you’re able to obtain a lower interest rate on a debt consolidation loan, you may be able to use the funds to make extra payments and pay down your debt faster.
Drawbacks of Business Debt Consolidation
Business debt consolidation loans feature additional costs which, if you don’t weigh them correctly, can eat into the potential benefits.Potential fees
Debt consolidation can be costly. There are a number of fees you will need to cover associated with processing, underwriting, and closing on your new loan. These costs can quickly add up, so it's important to weigh them thoroughly against the benefits.
Potentially higher interest rates
There’s no guarantee that the interest rates you’ll receive on your debt consolidation loan will be lower than those on your current loans. In fact, depending on market influences and your own qualifications, it’s possible that the interest rates you receive could be higher than the loans you’re trying to consolidate.
You’ll want to compare different debt consolidation loan offers alongside one another in order to understand the best rates you can qualify for. Using a B2B business financing platform like National Business Capital is a great way to get an overview of all your opportunities. Rather than apply to lenders one by one, you can receive multiple competitive offers with one digital application.
Won’t solve underlying financial issues
If your business’s debt-to-income ratio is high and you’re struggling financially to pay back your debts, consolidating your loans won’t offer much relief. In these cases, you’ll need to focus on addressing the underlying issues in your business instead of consolidating your debt.