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BFS Capital Blog

A Quick Guide to Debt Consolidation for Small Businesses

September 13, 2016

Starting a small business requires borrowing money. A lot of it.  And sometimes your cash flow won’t allow you to make all your debt payments. So when you’re falling a little behind on your small business loan, your merchant cash advance, and your maxed-out credit cards, debt consolidation might seem like a tempting way to keep the creditors at bay. But what exactly IS debt consolidation for small business? And does it actually benefit you?

That all depends. Before you dive into debt consolidation, there are a number of things you need to consider. See our list below.

What Is Debt Consolidation?

Simply put, debt consolidation is taking the numerous debts you have – loans, advances, credit cards, etc. – and paying them all off with one loan, leaving you beholden to only one creditor. It differs from loan refinancing in that loan refinancing typically only applies to a single debt, whereas debt consolidation takes multiple debts and consolidates them.

It can be a benefit to a small business that has multiple high-interest, short term loans that could be better paid off over a longer period at a lower interest rate. It can also simplify your accounting and monthly expenses, with only one payment to make and one debt to account for. The goal is basically to have the fewest loans at the lowest interest rate with minimal impact to your credit score. So even if you fall behind on your consolidation payment, it’s only one negative report instead of five or six.

But it’s not the silver bullet to solve your financial problems either.

What to Consider Before Consolidating Small Business Debt

The first thing you need to look at is the amount of your total debt. If it’s a manageable amount and you’re able to make the debt payments, you probably don’t need to consolidate.

However, if your debt is keeping your business from growing, look at the interest rates on each loan and what your total monthly payments are. Then figure out which debts need to be paid down now, and which can wait. Nobody says you have to consolidate ALL your debt, and the higher-interest, shorter term loans might be the only ones you need to pay off now. So pick which debts you want to combine, and calculate out the monthly payments (you can try this calculator).

Then do some shopping around for different debt consolidation loans, and see what kind of terms you can negotiate. The interest rate and monthly payments are important factors, but also calculate how much you’ll pay, in total, over the course of the loan. Oftentimes debt consolidation loans stretch out over a longer period of time, and you’ll end up spending more money.

If the payment on the debt consolidation is significantly less than you’re paying now, it might be a good move. Especially if the total amount you pay over time is comparable. But you’ll also need to find out if you have any early payment penalties on existing loans, and if the interest rate you’re paying is fixed or variable. If your payments could spike with fluctuating interest rates, it might not be a good idea. And if your early payment penalties negate any savings, again, it might not be worth your time.

Finally, remember that obtaining a debt consolidation loan is a process like any other, filled with meetings, paperwork, phone calls and approvals. If you don’t have time to go through it, and the savings aren’t significant, it might not be the right thing for you.

Other Things to Consider

Debt consolidation loans, like any other loan, can be either secured on unsecured. Putting up your home or another asset as collateral for a lower-interest-rate secured loan might be tempting. But remember if your business fails, a secured loan might see you losing your house as well. An unsecured loan will most certainly have you paying more in interest, but the risk is far less.

Really look hard at how much the loan will cost over time. Paying off a 10 year loan over 20 years, even at a lower interest rate, can cost considerably more. Also, remember that simply qualifying for debt consolidation doesn’t mean you should do it. Examine if you have the cash flow to pay all your debts on time, and weigh that against the time and effort it would take to consolidate. And as always, have a financial advisor look over your consolidation agreement to ensure you’re getting something beneficial.

Debt consolidation might seem like a nice solution to the stress of debt collection, but remember it’s still borrowing from one institution to pay others. It doesn’t make your business any more profitable than it was before. If your business is drowning in debt, you’ll need to address a litany of other issues to right the ship. So while debt consolidation can make your life a little simpler, and might save you money, it must be done responsibly.