A negligible number of businesses have been run debt free. Every entrepreneur knows that without enough funding or capital, you cannot run a business. This means that most businesses have been built on debt. Unfortunately, there are cases when your rate of returns will be low and you will be unable to clear your debts. Taking supplies on credit and using your credit cards could seem like the best business decision at the time but with time, debt overcomes the business.
Even though such situations threaten the existence of businesses, they shouldn’t be the end of your ventures. You can turn things around by having an effective debt management strategy. While there are many strategies devised to help you manage debt, taking a loan to repay the debts then having to repay one loan, or debt consolidation has always been a preferable debt management strategy.
Not every business or business owner is considered a great candidate for a debt consolidation loan. To qualify for a debt consolidation loan, you should have the following characteristics ticked off:
Having multiple outstanding loan products
If you are currently paying off more than one loan product and would like to combine the loan debts into one loan with one rather than multiple monthly repayments, then you should consider and you could be considered for debt consolidation.
Having high interest loans
Debt consolidation loans often charge lower interest rates. If you are looking for a way to lower the current high interests on your loans, then you are a candidate for debt consolidation. However, you should note that low interests on debt consolidation loans areapproved after your revenue, credit score, and time in business have been analyzed.
Strong personal credit score
The biggest determinant of whether you qualify for loans or not and the amount you qualify for is your credit score. Your qualification for the debt consolidation loan and the interest rates charged largely depend on your credit score. If you have a low credit score, you may not get better terms on the loan interests since you are perceived a high-risk borrower and lenders have to protect you.
Current short term loan products
If you need more time to repay your current short term loan products, then you should consider consolidation. A consolidation plan with a multi-year term on the loan could be what your business needs to improve the business’ cash flow.
Read also: Advantages of Getting a Business Loan
When debt consolidation makes sense for your business
Yes, you can take a debt consolidation loan when you feel and know that your business will not grow effectively with the high current expenses. Once you analyze the business revenue, expenses, cash flows and the future potential of the business, then you may consider getting the debt consolidation loan.
How to get the debt consolidation loan
The first rule of debt consolidation is shopping around. The advent of technology and the shift from traditional banking and financing platforms to internet banking has opened up a bigger market for businesses offering different debt consolidation packages. The variance may not seem too big at first, but you shouldn’t overlook the fact that some packages come with many hidden charged and fees.
To get the best debt consolidation loan for your business, follow the following simple steps:
Identify all existing business debts
By the time you are considering a debt consolidation loan, you should have listed the debts you have. However, you should have accurate figures of the amount you owe your creditors. So, prepare a schedule with details of the loans, their total value, including the interests and fees then get an amortization schedule just to ensure that you have the exact value of the debts.
The amortization schedule should be used for all the other loans then use the ending value and add that for all loans. This is what you owe your creditors.
Look for prepayment penalties
When a lending institution extends a loan to you, they expect to make money by the time the loan matures. When you pay them everything ahead of time, they don’t make as much as they wished to. Therefore, some lenders include a prepayment penalty if you pay everything ahead of time. Do your loans have this penalty? Include that cost in the amount to be paid.
How much are you consolidating?
With the totals above, including penalties and other fees, determine the amount you wish to consolidate. That amount equals the total size of the debt consolidation loan you’ll apply for.
Calculate the effective APR
Interest rates vary. To be safe, use the Annual Percentage Rate, APR to calculate the interest that will be charged for the loan product. APR is preferable to other rates since loans have different terms, amortization frequencies, and the rates could be calculated using simple or compounding interest processes.
Shop for funding options
You can get a debt consolidation loan in form of funding options like a personal loan, an SBA, or alternative debt consolidation lenders. Before agreeing to anything, you should carry out due diligence to ensure that the package is the best for you.
As you shop around, compare the APR offered by the lenders. The amortization and the effective APR calculator will help you in determining the best rates.
Sign the dotted line
Once you have found the most preferable lender with the best loan package, a favorable amortization schedule, and low or affordable interest rates, you should put pen to paper. Ensure that you read all the details of the fine print before signing.
Pay existing debts
Once the loan is approved and in your bank account, pay off your debts. Pay the total amount due regardless of what else comes up. The loan should cover the existing loans if you calculated everything well.
To protect and to improve your credit score after debt consolidation, follow through with the payments. Make it a rule to pay all your debts before they are due. Most debt consolidation loans lack the prepayment penalty. When you can, pay more than you have to.
In conclusion, make smart choices for your business and only consolidate when it is the best strategy that could even result in savings. Avoid unnecessary expenses and be frugal in your business spending. Finally, do not skip a repayment.