Whether to secure working capital, or to pay for specific projects, growth initiatives, or investments, debt financing is a part of life for the vast majority of businesses today, including most small businesses.
Given the volatile nature of the small business world, however, things can change in a heartbeat, and what once seemed like a reasonable amount of debt, repayable on a reasonable schedule, suddenly doesn’t seem so… reasonable anymore.
Struggling with debt can cause even the best-run small businesses to derail and close up shop, especially if it is not properly managed and minimized. One easy, affordable way to do just that is to utilize a debt consolidation loan.
There are many misconceptions around debt consolidation, and, accordingly, debt consolidation loans.
This is especially true among businesses and small business owners who would rather focus on running their business than spending hours or days with their head buried in accounting records and spreadsheets.
However, in order to be the most effective leader for your business, it’s vital to understand the basics of different aspects of small business funding, including business debt consolidation.
It’s also a valuable tool that can help your bottom line, by saving you time and, more importantly, money. Getting a handle on your existing debt load, and moving your business forward, is what business debt consolidation loans are all about.
To help the busy small business owner better understand debt consolidation loans, we’ve put together this short guide, covering all the basics of what they are, how they work, and the advantages that they can offer to your business.
While no substitute for professional financial advice, this short read will leave you more well-informed about the potential savings your business can derive from a business debt consolidation loan. Let’s get started!
What is a Debt Consolidation Loan?
In simple terms, a debt consolidation loan is a loan, providing you with a lump sum of cash at the time you take it out. Unlike an ordinary small business loan, which usually has no restriction on how it may be used, this debt consolidation loan has only one purpose.
It is used to pay off multiple existing debts, and thus consolidate your business debt into a single debt consolidation loan, with a single monthly payment, servicer, and due date.
Most often, a debt consolidation loan is an unsecured loan, meaning no collateral is required. However, some lenders may offer only secured debt consolidation loans, with a collateral requirement.
This is far more common at banks than with private lenders, and most small businesses who are struggling with debt do not have (or do not want to risk) the assets needed to put up as collateral.
For that reason, many small business owners seeking business debt consolidation loans prefer private lenders and the unsecured variety of loan. In utilizing a business debt consolidation loan so, you can save substantial amounts of money.
How much money depends on factors such as your current debt load, the number of debts and servicers you have, fees charged, interest rates on current debt, what debt you choose to consolidate with your debt consolidation loan, and the interest rate and other terms you can obtain on a new debt consolidation loan, as we will discuss in more detail in the next section.
First, however, it’s worth pointing out that a debt consolidation loan doesn’t immediately reduce your total outstanding debt. You are simply trading multiple debts for a single debt – the actual amount outstanding is traded on a 1 for 1 basis, and what you owe is not reduced.
Rather, you are using the debt consolidation loan to pay off and close out some existing debts, effectively consolidating them into a single new debt, the debt consolidation loan.
This distinction is important, as people often mistake debt consolidation for debt settlement, which is a very different process, and one that invariably comes with credit score impacts.
That is not the case with business debt consolidation, which is credit-score neutral at worst, and credit-score positive at best.
How Does a Debt Consolidation Loan Save Your Business Money?
Debt consolidation loans can save your business money through two primary channels, and one secondary channel.
When combined, these channels can add up to a significant savings on your debt service costs, and the time and energy spent dealing with your debt.
However, as mentioned above, the impact for your business will largely depend on all the particulars of your debt load, interest rates, and related factors, so individual results may vary.
In all cases, one principle to keep in mind is to never take on a debt consolidation loan with an interest rate that is higher than the average rate on the debt you wish to pay off with the loan. That would be counter-productive!
The channels through which a business debt consolidation loan saves you money include:
- A reduction in interest costs for the debt you consolidate. It is always wise to use a debt consolidation loan to pay off your highest-interest debt first.
This will provide the largest amount of savings, the “biggest bang for your buck”, so to speak.
Securing a business debt consolidation loan with an interest rate substantially lower than your highest-rate debt, and lower than your average-rate debt, will provide the largest portion of your cost savings associated with debt consolidation.
- Moving from multiple servicers to a single servicer for your debt (or at least the portion of your debt that you are able to consolidate) can save you several hundred dollars per month, in the form of service and account fees.
Many servicers of business debts charge account maintenance, advisory, or service fees. If you have debts at multiple servicers, with multiple accounts, you can easily end up paying $50 here, $25 there, etc.
each month. By removing all those service fees, down to a single (or no) service fee with a debt consolidation loan, over the life of the debts, you can save thousands.
- The secondary channel by which business debt consolidation loans can save you money is through the reduced amount of time, hassle, and stress you will need to dedicate to managing your existing debts.
Instead of multiple debts, with varying due dates spread across the month, varying servicer accounts, payment instructions, and so on, a debt consolidation loan brings it all into one single debt instrument and payment.
If you outsource your accounting, debt consolidation will dramatically reduce the billable hours needed to handle your debt expense each period. If your accounting is in-house, this frees up your employees to spend their time on other, money-generating work.
Debt Consolidation and Credit Concerns
One of the most frequently-cited misconceptions about business debt consolidation is that it will negatively affect your business credit score. Nothing could be further from the truth!
The process of debt consolidation does not alter your credit score, at least not right away. You are opening a new line of debt, and closing out existing debts. The total outstanding amount stays the same.
While in rare circumstances, there may be some temporary negative impact (if you have very few loan accounts and are now utilizing a majority of your available credit facilities, for example), almost everyone who takes out a debt consolidation loan and applies it successfully sees no immediate change – up or down – to their credit score.
Over the short to medium term, however, business debt consolidation can definitely help to improve your business credit score and credit history.
Reduced debt expense, lower interest payments, fewer chances for late payments, and less money spent on debt can all translate to paying down debt faster, freeing up capital, not missing or being late on as many payments, and so on.
Many of those factors play a role in determining your credit score, and improving them will naturally help to improve your credit score.
When people worry about the negative credit implications of dealing with debt, they are almost always thinking of debt settlement or debt renegotiation, rather than debt consolidation.
The former involves getting lenders to agree to allow you to repay less debt (principal and interest) than they are otherwise owed, and absolutely does come with a negative credit penalty.
While preferable to bankruptcy, of course, it can still ruin a business’ credit, at least in the short term.
By contrast, as we outlined above, debt consolidation with a debt consolidation loan does not change the amount you owe your creditors, nor require any negotiation or payment for less than they were entitled.
Rather, it pays them off immediately, and consolidates your debts under a single debt consolidation loan, to your debt consolidation loan lender.
Debt Consolidation Loans from BizFly Funding
If business debt consolidation sounds like it might benefit your business, then consider applying for a debt consolidation loan at BizFly Funding.
BizFly Funding is a leading private lender in the US, focused solely on serving the financing needs of the small business community.
In addition to debt consolidation loans, they offer a full range of unsecured small business funding products, with competitive interest rates, and easy-to-meet qualification requirements.
You can apply and get pre-approved online, and, once approved, get funded in as little as 1 business day in many cases. They offer exceptional customer service, fast approval speed, large loan maximums, and so much more.
To learn more about BizFly Funding, or to start the application process, visit them online at https://bizflyfunding.com!
Frequently Asked Questions about Debt Consolidation Loans
As outlined in our guide, debt consolidation loans don’t negatively impact your credit, except in extremely rare circumstances (circumstances that wouldn’t generally make it a sensible decision to take out a debt consolidation loan in the first place).
Over a longer period of time, business debt consolidation loans actually help you to improve your credit, by freeing up capital, reducing the number of open accounts and variable payment dates, making it easier to make a single, periodic payment on-time and in full.
This also helps you to reduce your total debt burden over time more easily than without debt consolidation, which should also help to improve your financial viability and credit score.
The interest rates on debt consolidation loans vary by lender and based on several other business-specific financial factors.
In general, however, the averages in the US range from around 9% APR on the low end to around 30% APR.
Most businesses are able to secure a business debt consolidation loan with an average APR of around 19%, based on the latest available public data for 2019.
No. Debt settlement involves settling and negotiating debts owed to creditors for less than their full value.
Debt consolidation does not decrease the amount owed to your creditors, and in fact immediately pays them off with the proceeds of the debt consolidation loan.
That is why there are little to no negative credit score implications for debt consolidation, while there are significant implications for debt settlement.
Debt consolidation does not hinder your ability to take on new debts.
However, in the interest of paying off your debt and decreasing debt expense, you should more carefully evaluate the need for additional loans, lines of credit, credit cards, and similar.
You should also do what you can to shop around for a competitive interest rate, one that is roughly in line with (and not too much above) your debt consolidation loan. Otherwise, you will need to later consolidate that debt, and the cycle will continue.
Unlike most general unsecured small business loans, merchant cash advances, short-term business loans, and other small business funding products, debt consolidation loans are designed to only be used to pay off existing debts – in fact, that’s part of the loan agreement, a contract you sign with the debt consolidation loan lender before you receive the proceeds.
Debt consolidation loans cannot be used for general business purposes, but specifically, as the name implies, to consolidate your business debt.
