Debt consolidation options for small businesses may be something beneficial if you’re carrying multiple business loans. By combining debts into one manageable loan, business debt consolidation will potentially enhance cash flow and reduce overall interest payments.
In this article, you’ll get guidance on choosing a loan that helps you accomplish your small business debt consolidation goals. From traditional loans to alternative lenders, take a look at the complete insight below!
What is Business Debt Consolidation?
Generally, business debt consolidation means taking out existing debt business into a new loan with a single monthly payment. This leads to better control of the business’ debt repayment efficiently, improves cash flow, offers a more extended payback period, and lowers the interest rate than the original one.
It is recommended for business owners since the business debt consolidation process develops a more realistic business budget. This method also helps reduce the financial burden without potentially hurting borrowers’ credit scores.
Hence, the business owner will have less stress and focus on the optimal growth of their business.
4 Debt Consolidation Options for Small Businesses
There are several avenues open to small business debt consolidation. However, the route you take should be based on research and the lender’s offer of budget and time frame. Here is a quick look at each choice to consider.
1. Traditional Loans
A traditional loan is a bank or credit union program that provides a large mortgage funded by a private-sector lender. In practice, the conventional loan forms bank credit to a small business or a bank loan to finance property.
While it’s classified as unsecured loans, borrowers should be in the business sector for at least two years, have a solid cash flow, sufficient earnings for a down payment, and an excellent credit history to satisfy conventional loan qualification.
Since traditional loans are not federally guaranteed, the eligibility requirements are tighter than government-backed mortgages. Thus, the bank or credit union requires specific documents, such as identity, income, and employment history, before authorizing the loan amount to the borrower.
2. Business Lines of Credit
Business Lines of Credit (BLOC) are the next debt consolidation options for small businesses to consider. Similar to a business credit card program, BLOC lets businesses borrow a pool of funds, up to a limit. In its implementation, borrowers can withdraw funds anytime and only pay the amount of interest without any penalties.
Further, business lines of credit can work in both secured and unsecured versions. While the secured form requires assets as collateral for the loan, the unsecured version offers lower credit limits and no collateral.
With short-term cash requirements and a revolving line of credit, BLOC is beneficial to a small business since borrowers can reuse available funds after repaying them without having to reapply with the lender. However, to avoid cash flow problems, don’t use BLOC for routine long-term expenses.
3. SBA Loans
Small Business Administration or SBA loans may be the ideal option for small company owners who can’t qualify for traditional bank financing due to limited collateral.
It’s typically a federal program that provides financial assistance to small enterprises for various objectives, including expansions, real estate purchases, and cover startup costs.
With the U.S. government backing SBA loans, lenders may offer small business loans with less severe credit requirements and low down payments. Not only that, SBA loans have competitive interest rates and fees, as well as large maximum loan amounts and extensive payback schedules.
To meet SBA loan qualifications, borrowers should have a strong credit profile, a well-developed business plan, and relevant industry experience. Whilst the SBA is flexible with collateral, borrowers still require business or personal assets to be the loan security.
4. Alternative Lenders
Private or alternative lenders are the last debt consolidation options for small businesses worth considering.
These popular nonbank lenders use technology to expedite the financing process. Therefore, business owners can access business lending options through online or fintech lenders, crowdfunding platforms, and peer-to-peer lenders.
That said, the alternative lender offers a more flexible financial sense, competitive rates, and offering terms that best suit small businesses for up to two years. Interestingly, the alternative lender has less rigorous application requirements as it has a fast turnaround and minimal documents to apply.
Plus, lenders can apply for a loan online or over the phone, and obtain funds approval access in 24 hours. However, alternative lenders only have a limited range of final products and do not provide in-person customer support.
The Benefits of Debt Consolidation Options for Small Businesses
Consolidating all of your debts into a single business loan has several advantages, as you can learn through the following brief.
1. Administration Simplification
As mentioned above, debt consolidation cuts down your multiple payments due date. It also removes a considerable amount of administrative stress, and decreases the risk of accidentally missing a payment in an effective way.
2. Single Point of Contact
Talking to multiple lenders can be extremely time-consuming. By doing small business debt consolidation, you end up with a single point of contact to discuss any related issues.
3. Credit Score Improvement
If you have been frustrated with multiple loan repayments then a debt consolidation option will stop any further damage to your small business credit score! That said, the credit utilization ratio and credit score could improve efficiently.
4. Reduce Stress
Struggling with multiple debts can be extremely stressful and overwhelming. Consolidation provides peace of mind by reducing the number of payments you need to track each month and serving the financial situation holistically.
Is Debt Consolidation Options for Small Businesses Worthwhile?
While tracking multiple payments can quickly become tiresome, small business debt consolidation loans present greater convenience – making it easier to repay what you owe into one single funding.
By far, the small business debt consolidation options from traditional loans to alternative lenders offer simplicity with pros and cons available. However, the best loan option depends on business needs and circumstances.
If you consider a large amount of capital, a traditional loan will best suit your needs. Then, pick Business Lines of Credit (BLOC) for short-term credit and SBA loans for easy qualification. Lastly, take alternative lenders to experience a quick lending process.