There is only a negligible number of business enterprises which run totally debt free. A successful entrepreneur knows that it is impossible to run a business without enough funding or working capital. This means that most of the now successful businesses are built on the basement of debts.
Some of the strategic business people have the upper hand in debt management, but unfortunately, there are many cases where the expenses go higher than the returns and entrepreneurs find it difficult to clear off their debts on time. Taking supplies and running on credit may seem to be the best decision at times, but sometimes, the debt may overcome the business.
Managing business debts
Even though there may be such situations threatening the existence of your business, don’t let it be the end of ventures. There are several ways to turn things around with effective debt management. There are many strategies devised to manage debt, and debt consolidation is one of the most effective debt management strategies for businesses.
In fact, not all businesses and entrepreneurs are considered to be apt candidates for debt consolidation. In light of your debt, check for the below characteristics to identify if you qualify to go ahead with debt consolidation.
Criteria #1: Having multiple existing loan products or line of credits
As a business debtor, if you are paying off two or more loan products or paying back on other lines of credit, then you can combine all of them into a single loan. To do this well, you need to know the right ways to consolidation business debts.
Criteria #2: Paying off a higher than standard interest
One significant advantage of debt consolidation loans is that it can offer some attractive interest rates. If you have ended up paying off a higher interest by falling for loan at a financial emergency, then you can think of consolidation to get the advantage of a lesser interest rate. However, you need to know that the debt consolidation loans too are approved after scrutinizing your credit score, revenue, and the status of the business.
Criteria #3: Reassuring credit score
In case of any cash advance of financial aid, the biggest determinant is the credit score of the debtors to see whether they qualify for loans. The qualification and terms for debt consolidation loans too vary largely based on the individual’s credit score. If you have a non-reassuring credit score, then the terms of loans may be more stringent.
Criteria #4: Is debt consolidation making sense to you?
You need to thoroughly analyze to see whether going ahead with a debt consolidation loan makes sense to you in light of your existing financial situation. Once after analyzing the business revenue and cash flows, you must consider going for a debt consolidation by seeing the future potential of your business too.
Getting a debt consolidation loan
Further, we will discuss the step-by-step approach to planning for getting a debt consolidation loan as delineated by the experts.
- Identify existing debts
Before you consider consolidation loans, one should list out the existing doubts. You should get the accurate figures of the amounts you owe to creditors, the interest rates of each, and the term of payments. It is ideal to prepare a comprehensive schedule with the details of loans and their total value to understand the total value of your existing debts. Experts suggest that an amortization schedule can be used for all loans and add values for all loans to find what you actually owe to all creditors.
- Evaluate the penalties
While a financial institution extends the loan, they expect to get it paid back by the maturity of the loan. When you are planning to pay it off ahead of time, it is not a favorable situation to them and most of the lenders put forth a prepayment penalty. This has to be considered if you are planning for closing existing loans through consolidation.
- How much and which all to consolidate?
By calculating the totals as above including penalties and other involving fees, identify the total amount to consolidate. This is the total debt consolidation loan amount you should apply for. However, it is not necessary that you have to consolidate all the loans, but you can be picky based on a baseline assessment as to which all loans can be excluded from this plan. For startups, it will be good to know easy ways to manage debts from the very first.
- Calculate APR
The interest rates may vary from time to. The safest approach is to calculate the APR (Annual Percentage Rate). For lenders, APR is the preferable mode of repayment calculation compared to other loan product. As loans have different terms, rates, and amortization frequencies, APR can act as a common unit to identify the worthiness of various products in light of your customized requirements.
- Shop around for various funding options
You may get debt consolidation loans in various forms like personal loan, secured or unsecured loans, SBA, or from the direct debt consolidation lenders. So, before signing up with anyone, you should first carry out due diligence to make sure that you are choosing the best possible option for you.
- Compare the terms and APRs
Along with shopping around for various possible options, compare your APRs offered by different lenders. The amortization and APR calculator may help you to determine the best possible rates.
- Read the terms and conditions carefully
Don’t be in haste while you process the debt consolidation loans. Once, if you find out the best possible lender, work it out with pen and paper. Make sure that you read all the details on the fine prints and whitepapers to understand the terms and conditions rightly.
- Pay off the existing debts
Once your consolidation loan is approved, meet your primary objective of paying off existing debts at the first point. You may find other financial needs also simultaneously, but you are making a big mistake in thinking of utilizing the consolidation loan for any other purpose than paying off existing doubts.
- Make the repayment faithfully
In fact, what changes after consolidation is only the number of creditors, but the financial liability remains the same. You have to faithfully make the repayment and do your financial planning in a much more structured way to avoid further accumulation of debts. Make it a habit that you pay off your debts before the due date itself.
To conclude, always make the smartest choices when it comes to consolidating your business loans and avoid any unnecessary expenses by being frugal in the business spending. Further, don’t skip a single repayment.