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10 questions whether small business debt consolidation is right for you

Pros, Cons, and Solutions of Small Business Debt Consolidation

 

10 questions whether small business debt consolidation is right for you This post will answer 10 common questions regarding small business debt consolidation and the pros, cons, and solutions. We will also provide tips on choosing the right business loan for your needs.

Small businesses often have a mountain of debt, making running your business difficult and causing problems down the road.

Debt consolidation loans are outstanding for small businesses because they allow you to consolidate multiple debts into one loan payment. They also help you eliminate high-interest rates and fees associated with having multiple accounts.

But not every small business owner should consider taking out a debt consolidation loan. Many small businesses will benefit from paying off their debt instead of consolidating it. Here’s why…

It’s not unusual for the owner of a small firm to be in debt. Low-interest debt, a relatively low annual percentage rate, an extended repayment period, and affordable monthly installments can put you in a solid financial position.

The problem is that not all debt is the same. Credit cards and lines of credit, for example, typically come with higher interest rates, shorter payment terms, and monthly payments, all of which can wreak havoc on a small business’s ability to make ends meet.

 

Can You Consolidate Business Debt?

 

Business debt consolidation loans are available from various lenders and can be used to pay off multiple creditors at once.

A debt consolidation loan for businesses allows you to combine several smaller loans into one larger one, simplify your repayment plan, and, ideally, get more favorable terms such as reduced interest rates and fewer payments.

Today’s most significant challenge for most companies is managing their cash flow issues. This money management challenge is because too much money is floating around, and not enough is going where it needs to go.

It’s easy to see why credit card debt has grown to such epidemic proportions. We spend more than we earn, and when we run out of money, we borrow even more.

But here’s the real kicker. If you keep borrowing more money, you’ll eventually find yourself in a situation where you owe more than you own. 

That’s called bankruptcy.

While bankruptcy may seem like an extreme way to handle your business finances, it is pretty common.

Filing for bankruptcy under Chapter 11 is the most challenging option, and it’s also the priciest way to file for bankruptcy protection. The legal fees may be too much for a struggling business to bear on its own, pushing them toward bankruptcy.

Further, the reorganization plan must be manageable enough for the bankruptcy court to approve. A business should only consider filing for Chapter 11 restructuring after exhausting all other options.

Some examples of why businesses use Chapter 11 are listed below:

 

* To reorganize your debt and avoid liquidation or foreclosure.

* To restructure your debt and repayment schedules and continue operations.

* To reduce your liabilities by selling assets.

* To protect your intellectual property rights.

* To obtain a court order that allows you to use cash collateral (money owed to other parties) without giving up ownership of the collateral.

* For other purposes.

 

If you’re thinking about filing for bankruptcy, there are two things you need to know first.

 

First, if you do decide to file for bankruptcy, you must follow the rules set forth by the U.S. Bankruptcy Code.

 

Second, you cannot discharge any personal liability for your business debts through bankruptcy.

If you declare bankruptcy, you won’t be able to wipe away your business debts. Instead, you’ll end up owing those debts just as you did before you filed for bankruptcy.

In addition, you’ll still be responsible for repaying any business debts that aren’t discharged.

What happens if you don’t qualify for a business consolidation loan?

 

If you have challenges keeping track of your money, you may soon declare bankruptcy unless you take action.

To one’s relief, there are means of protecting oneself from this outcome. One of them is debt consolidation. Combining many unsecured debts into one can lower your monthly payment amount while still paying off your loan balance.

In addition to reducing interest rates, paying back your business debt consolidation loan is easier since you only have to make monthly payments once instead of separate payments for each business loan.

However, there are two main problems with debt consolidation. First, it doesn’t necessarily solve your financial issues. Second, it often requires you to re-evaluate your business and your ability to manage the day-to-day cash management.

Let’s break down these two issues carefully.

How to Consolidate Business Debts

 

Due to a shortage of initial funding, small enterprises frequently need to turn to debt financing. This lack of capital due to over-extension means they may be unable to repay the small business loan when due.

This inability to repay can lead to them making payments for extended periods, which can cause problems for both the company and its owners.

Personal Loan

The most common way to deal with this problem is to apply for a personal loan or against home equity. If you have bad credit, this presents additional challenges. However, there are also other options available to help companies avoid bankruptcy.

Debt Management

Getting on a debt management program is one possibility (DMP). These plans help companies manage their debts and repay them more quickly.

A DMP is usually available through an independent third party, such as a credit card provider or bank. Companies can choose whether to accept the terms of the plan or not.

Consider debt settlement as a potential alternate. To settle debts, debtors and collectors negotiate a reduced payment.

Debt settlement is generally a last resort, however, as it can be challenging to negotiate with multiple creditors simultaneously.

There are both pros and conss to using each of these techniques. For example, while a debt management plan might seem attractive because it allows you to repay your loans faster, you could lose control of how much you owe.

On the other hand, debt settlement requires negotiation with multiple creditors, which can be complicated and time-consuming.

What Is Business Debt Consolidation?

 

Have you heard the term small business debt consolidation?

 

What does it mean? What is it used for? How do I take advantage?

A person who owns a small company is likely familiar with this term. It’s been around since the early 2000s and has become more popular. The idea behind it is simple: if your credit card bills are too high or you don’t know how to handle all of your accounts, then you should consider consolidating your debts.

It sounds like a good idea, right? After all, wouldn’t it be great to get rid of all those pesky monthly payments and just focus on paying off one big bill?

Well, there are some things to remember before consolidating your business debts.

First, what exactly is debt consolidation?

When you talk about debt consolidation, you are talking about debt restructuring, and the two words are almost synonymous.

In short, debt restructuring refers to taking several different types of debts and combining them into one single payment.

Say, for instance, you maintain three different credit cards. Each card charges $200 per month, and if you pay only the minimum payment on each card, you will spend $600 monthly.

However, if you combine all of your credit cards into one payment, you would only need to make one payment of $400. That means you would save $200 every month!

That’s why debt consolidation is so appealing. You can take care of all your debts at once instead of worrying about making individual payments every month.

But, there are some downsides to using debt consolidation.

The first thing to keep in mind is that you won’t be able to do anything else with your money during the process. Your entire income will go towards repaying your debts.

That means you won’t have any extra cash left to invest in your business or even cover unexpected expenses.

Second, you may end up spending more than you originally planned.

When you start with debt consolidation, you typically have to put down a large deposit, and this is called the “good faith deposit,” and it’s the price you pay to enter into a debt consolidation agreement.

Once you sign the agreement, you will begin making regular payments to your new creditor. However, you will still have to continue making your old payments.

This strategy means you will have to pay the old and new creditors. And, when you add up all of your payments, you may be spending more than you expected.

Finally, you may not qualify for debt consolidation.

Many factors determine whether or not you qualify for debt consolidation. 

For instance, your credit score plays an important role.

You also want to ensure you have enough money to repay your debts.

Finally, you must be willing to work with a reputable company. There are plenty of companies out there that offer lousy advice and scam people out of their hard-earned money.

You will be OK if you follow these rules. But, if you struggle to meet your obligations, you might want to look into other options.

There are many alternatives available to help you manage your finances better. 

One option is to use a finance software program. You can keep tabs on your finances, make plans, and assess your success with the help of these applications.

A personal loan is another option. You can borrow money from a bank or other lending organization as a personal loan.

Personal loans come in various forms, including unsecured loans, secured loans, and lines of credit.

Unsecured loans are usually easier to obtain than secured loans. Secured loans require collateral as security.

You can secure a loan with collateral if you have anything of worth to put up as a guarantee.

For example, you could use this property as collateral if you own a home. Or, if you have valuable assets such as jewelry or artwork, you could use them as collateral.

Business owners who wish to purchase equipment or expand their operations use secured loans. Lines of credit are similar to secured loans because they require collateral.

However, unlike secured loans, lines of credit don’t require you to provide collateral. Instead, you simply need to make a payment each month.

Lines of credit are great for small businesses because they give you flexibility. When money is tight, you can borrow against your credit line until you have enough to repay your debts.

How can you benefit from it? 

Business owners often face challenges when running their businesses. One of the most common problems is a lack of cash flow, which means they cannot pay for all the liabilities that come with operating a business. 

These expenses may include paying rent or mortgage payments, buying inventory and other supplies, and even covering employee payroll. If this problem persists over time, it could lead to financial issues such as missed bills, late fees, and even bankruptcy. Fortunately, small business debt consolidation can help.

When you consolidate your business debts, you combine multiple monthly payments into one single payment.

These consolidated payments make it much easier to handle your finances. You no longer have to worry about making several extra monthly payments; instead, you only have to make one large payment.

In addition, you can save money by consolidating your debts. Many lenders charge higher interest rates on business loans than on consumer loans, and you lower your overall interest rate by combining your business loans into one larger loan.

You also reduce the risk of defaulting on your loans. When you take out multiple smaller loans, you increase your chances of failing to repay any of those loans. However, consolidating your loans into one larger loan with a lower interest rate dramatically decreases your chance of defaulting.

And what are the pros and cons of it?

Debt consolidation is an option most businesses consider when faced with overwhelming amounts of debt. It involves taking advantage of lower interest rates on loans and credit cards to pay off higher-interest debts.

However, before consolidating your small business debts, here are 10 critical questions. 

Business owners often face challenges when they try to grow their businesses and want to expand, but they don’t always have enough capital. 

When you look to consolidate your business loans, you need to answer the following:

 

10 Questions To Determine Whether Small Business Loan Consolidation Is Right For You

 

1. **Do You Have Enough Capital?**

If you are looking at consolidating your business loans because you need more money to invest in growing your business, then it might be time to consider other options first. If you do not have enough capital to make investments that will help your company grow, then you should probably focus on raising additional capital instead of borrowing more money.

2. **Can You Afford It?**

Considering consolidating your business loans to pay down high-interest debts, you must first determine if you can afford them. It helps if you calculate how much extra income you would need to generate each month to cover the costs associated with debt consolidation.

3. **Are Your Loans Repayable?**

Another thing to consider when considering loan consolidation is whether you can repay your current loans on schedule. If you cannot repay your existing loans, you should reconsider using debt consolidation to pay off your debts.

4. **What Are The Consequences Of Not Repaying Your Loan?**

When you consolidate your business loans, you may pay less interest over the long term. But there are consequences to not repaying your loans. For example, if you fail to pay back your consolidated loan, you could lose access to future financing.

5. **Is There a More Efficient Method Of Handling Your Business Finances?**

There are many ways to manage your finances. One way is to avoid getting into debt in the first place. Another way is to use debt management programs like debt consolidation to get out of debt faster. And another way is to pay off all your debts as quickly as possible.

6. **Will This Help Me Grow My Business?**

So many people choose to consolidate their business loans because they believe it will help them grow their companies. While true, it is only a part of the equation. You also must ensure that you have the resources needed to grow your business.

7. **How Will I Feel About Having More Debt?**

Consolidating your business loans can feel good in the short run. After all, you will no longer have to worry about making monthly payments. But, if you continue accumulating new debt, you risk feeling overwhelmed by the debt you owe.

8. **Considering the time frame, does this make sense?**

One of the most prominent reasons so many business owners choose to consolidate their debts is because owners feel it will save them time. But, while it does take less time to consolidate your business loans than to repay them, you still need to find the time to manage your finances and keep track of your bills.

9. **Will This Be Beneficial Long Term?**

The last question you should ask before consolidating your business loans is whether or not this decision will benefit you in the long term. Many small businesses fail because they cannot handle the financial pressures of running a business. By consolidating your business loans, you allow yourself to build a stronger foundation for your business.

10. **Do These Questions Apply To You?**

If these questions apply, you should consider consolidating your business loans. Remember, though, that even if you decide to consolidate your business loans today, you still need to start budgeting and saving money.

The Advantages of Debt Consolidation for Small Business

 

Here are some pros and cons of small business debt consolidation.

Pros

 

  • More affordable payments – Interest rates on small business debt are often lower than those on personal consumer debt. For example, you could save hundreds of dollars monthly if you consolidate your debt.
  • Better repayment terms – Many companies offer small business debt consolidation programs that allow you to spread your repayments over extended periods. This strategy makes it easier to manage monthly expenses while giving you more freedom over your finances.
  • Lower balances – By consolidating your debts, you reduce the amount owed to lenders. As a result, you can potentially borrow less money and/or negotiate a lower interest rate.
  • Fewer headaches – Not having to deal with multiple creditors is a significant relief. You also avoid the hassle of managing multiple accounts and tracking payments.
  • Improved cash flow – With fewer outstanding obligations, you’ll find it easier to plan and focus on growing your business.

Cons

 

  • Higher costs – There is usually an upfront fee associated with most small business debt consolidation plans. These fees typically include application processing charges, credit reports, credit score checks, etc.
  • Less flexibility – Once you sign up for a small business debt consolidation program, you must commit. So if you change your mind later, another option might not be available.
  • Challenging to exit – If you decide to leave the company, you’ll likely have to repay the entire balance of your original loan. You’ll also have to pay back the fees incurred during the process.
  • Riskier borrowing – Lenders may require additional collateral to secure your debt. Putting up assets or collateral could increase the riskiness of your business.
  • Higher interest rates – Your new loan will probably carry a higher interest rate than your current debts. Consequently, your overall interest payments will increase.

Can My Company Benefit from Consolidating Its Debts?

 

The answer depends on how much debt you owe, where you stand financially, and whether you want to take control of your finances.

When determining whether or not to employ debt consolidation, there are a few things to keep in mind. However, these three questions are good places to start.

Before signing up for a debt consolidation plan, you should weigh the benefits against the drawbacks. If you go ahead with it, you’ll see quickly which benefits are the most significant.

Steps to Take to Consolidate Debt

 

Some of the debt relief solutions provided below may help business owners who have trouble making ends meet owing to rising debt levels.

Don’t get into a financial bind: choose a less stressful funding method to avoid the chokehold on your cash flow and business’s success.

Some entrepreneurs think avoiding a headlock is the best way to escape from one. Similarly, if you want to manage your debt better, you should initially strive to incur less bad debt.

Consider the following points before submitting a loan application:

  • How much are you spending right now?
  • How much do you stand to gain, exactly?
  • To what extent do you require monetary assistance?

Debt Consolidation Loan Options

 

Credit cards, for instance, might not be your best bet, depending on how quickly you need the cash and for what purpose.

In many cases, a loan to a small business will be more favorable, allowing you to spend less overall and pay off your loan faster.

Working capital for equipment purchases and salary might be best served by an SBA 7(a) loan or a bank term loan.

Before committing to any strategy, you should weigh the pros and cons of your available debt-financing options.

  • The rate of interest
  • The terms and conditions
  • The cost that you will be liable to pay every month
  • Total of the loan fees

Debt Consolidation for Existing Debt

 

When you consolidate your debt, you obtain a new loan to settle your existing debts. The new loan rate must be less than the combined interest rates of your current debts for this to make financial sense.

Consolidating debt is seemingly becoming more common. The percentage of business owners seeking financing to reduce their debt rose from 30% in 2019 to 32% in 2020.

The most popular method for consolidating debt is loan consolidation. This type of loan allows you to pay off multiple loans with one payment. 

As a result of the lower interest rates and more extended repayment periods, your monthly debt payments will be cheaper with this sort of loan (but you may pay more in the long term).

Another option is a line of credit or revolving credit card. These types of cards allow you to borrow money against future revenue.

For example, getting an SBA loan to consolidate debt may be the best decision for a company. Getting rid of two small loans can free up a substantial amount of cash in your budget, and that’s capital you can invest toward future business expansion or personal savings.

A typical debt consolidation method is transferring all outstanding balances to a single credit card. However, be wary that the cost could soon escalate due to interest. Watch out for the imposition of any balance transfer fees. Because of this, a loan to consolidate debt may be the best choice.

Reallocate the amount of money you are putting aside for your business expenses

 

Expenses that don’t result in a net gain in either time or money could be eliminated as part of your consolidation approach.

Put these concerns into your decision-making process:

  • Do you have a costly office where your staff could be more productive working from home?
  • Do you have a task in-house that would be more cost-effective to hire someone else?
  • Do you have recurring monthly charges for services that you rarely use?
  • Review your monthly spending and think about ways to save money, no matter how tiny, to help you get out of debt faster.

Getting a quick cash infusion

 

If the money coming in is king, then money coming in quickly is usually the queen.

Do you sit on a cache of unused tools or machinery? Think about trying to sell it to another company!

Do you happen to be sitting on unsold stock? You should have a quick sale sometime.

Is your company in a position to offer educational opportunities like webinars and classes? It is essential to think about informing your target audience and beginning event planning.

If your small business receives an inflow of cash, it could help it get closer to freedom from your overwhelming debt.

Pay your bills in order of importance.

 

How many credit cards do you currently have to pay off? Two common strategies are:

  • Focus on paying off the card that has the highest interest rate first. In many cases, this will result in a lower overall cost.
  • To eliminate debt, start with the card that has the smallest balance.

While the second approach will most certainly result in an immediate gain (which is always welcome), the former is the more cost-effective option in the long run. If you want your business to succeed, you need to consider any decision’s short- and long-term consequences.

Reduce your debt by renegotiating your interest rate and payment terms.

 

The skill of negotiation is a lost talent to some extent, but you can use it to your advantage. Creditors strongly desire to collect, but they can be reasonable when given a chance.

You can negotiate a settlement in which you pay off your debt for less than you owe or ask for an extension on your loan’s duration in exchange for reduced monthly payments. Simply asking for what you want could yield unexpected results.

Also, consider debt refinancing. 

Refinancing is a great way to reduce your annual interest rate and pay off some of the principal on your loan.

If you are having difficulties repaying your business loans, many options are available to help you out, whether bank loans or business funding from alternative lenders. 

You can talk with your lender about consolidating or restructuring your payments. If that doesn’t work for you, you may be able to get an income-based repayment plan.

Also, remember that certain creditors offer assistance plans tailored to the needs of enterprises going through tough times. Contact your bank and inquire about your choices.

The benefits of responsible borrowing

 

You now know the difference between good debt and bad debt. In many cases, there are perks only available with good debt. Suppose, for instance, that you invested the funds in a piece of machinery that will allow you to produce your goods at a higher rate of speed.

Alternatively, you might apply for a loan from the Small Business Administration to pay off your high-interest debt. Strategic borrowing may help boost your bottom line in all of these cases.

Make and follow a spending plan

 

The achievement of your consolidation goals is frequently dependent on a well-thought-out approach. As an intelligent business owner, you know the need to be ready for anything.

If you want to be successful with your budget, you need to include more than just your regular bills and extra cash set aside for debt repayment.

Think about starting or adding to an emergency fund, so you do not get caught off guard financially. You should also plan ahead for infrequent costs, such as when your business permits expire or when you need to hire seasonal help or purchase seasonal merchandise.

It’s also important to set aside money for “extras.” You shouldn’t deprive your small firm of all discretionary funds because it has debt.

You need a plan for debt consolidation.

 

You may be able to run your small business with less debt. The most important thing is to be aware of your current financial situation and to act in a way that will help you lower your debt and strengthen your cash reserves.

Conclusion

 

If you have small business debt, you may wonder which business debt relief option is right for you. You have a lot of choices, but the one that’s right for you is the one you should use.

For example, you might consider a secured loan if you have bad personal credit scores and borrow against your company’s assets.

However, you may find that an SBA loan makes sense if you have excellent credit. You will likely benefit from working with reputable online lenders like Sunwise Capital. 

As a direct lender, we offer free quotes, fast approval on our online loans, and flexible payment terms with affordable rates that work well for any budget. Visit us at www.SunwiseCapital.com to find out whether you are eligible.

Mark J. Kane is a successful entrepreneur spending the last 16 years lending money to business owners. Beginning his career as a psychologist, at the age of 23 he became the youngest Hospital Admin running a 100+ bed facility. He built two businesses to over 500 employees and a business from scratch to over $18M in revenue in 18 months before selling. This experience led him to begin Sunwise Capital.

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