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Business Debt Consolidation Loans | What You Should Know
One of the many tools available for businesses to smooth their financial problems in times of stress is the consolidation business loan. But what is a consolidation loan, how do they work, are they 'worth it', and how can it help your company recover from stretched finances? Read on…
Table of Contents
What is a Consolidation Business Loan?
The 7 Benefits of a Consolidation Business Loan
The 4 Downsides of a Business Consolidation Loan
Business Loan Case Studies
What Can a Consolidation Business Loan Cover?
The Difference Between a Business Consolidation Loan and Refinancing
An Example of a Business Consolidation Loan
Avoiding The Lines of Credit Trap
Applying for a Consolidation Business Loan
What is a Consolidation Business Loan?
A consolidation business loan is a type of business loan specifically designed to help you consolidate all your other business debt into one, unified loan.
Consolidate means to combine and stabilise.
With reference to business loans, it is the practice of bringing multiple debts together into one single loan. All the other loans, lines of credit, and other outstanding financial obligations are paid of by the consolidation business loan and you are left with a single payment each month.
This makes the repayment of your debts more manageable and strengthens the business finances in many ways.
How Much Could You Borrow?
Use our business loan calculator below to see what you could borrow.
The 7 Benefits of a Consolidation Business Loan
When you have the worry of multiple debt payments hanging over your head it can be hard to concentrate on the profit-making side of the business. There are many benefits to bringing your liabilities together into one consolidation business loan, including:
1. Reduced Size of Payments
Often, multiple debt payments spiral because you have overstretched and the business simply isn’t doing well enough each month to cover its financial obligations.
Of course, this will mean that your consolidation business loan will have a longer term of months or years before it is fully repaid, but smoothing out the repayments in this way will give your business the extra cash flow boost it needs to keep going and thrive.
2. Lowered Monthly Interest
While some business consolidation loans will have a larger APR than those they are replacing (discussed below), it is often possible to get a consolidation loan that has a better rate of interest than you are currently paying on many of your debts.
In fact, for many who are struggling with interest on several accounts each month, the entire repayment of the consolidation loan may well be lower than the current combined monthly interest payments, meaning that the monthly additional debt service of the consolidation business loan is effectively zero!
3. Simplified Administration
By combining all your debt service into a single payment, you remove a considerable amount of administrative stress. Not only is this simplified in terms of knowing when the payment leaves your business bank account, but it also means there is less chance of being caught out by a forgotten repayment and accruing additional bank charges on top of the debt itself.
4. Single Point of Contact
When you need to speak to your lenders, it can be extremely time consuming just contacting the companies and making arrangements. By consolidating your business loans, you end up with a single point of contact should you ever need to discuss any issues.
5. Improving Your Business Credit Score
If you have been struggling with making multiple loan repayments then you are no doubt aware that your business credit rating has been taking a battering!
A consolidation business loan will stop any further damage to your business credit score and after a few months of making the repayments on the consolidation loan, your credit score will begin to rise. It won’t be long before you are back in good standing with financial institutions and able to access the products that will help your business expand and develop.
6. Clearing Your Mind
One of the largest problems with debt stress that we see at Clifton Private Finance is the toll it takes on the business owner. That mental weight is often so considerable that it prevents you from running the business to the best of your ability, which leads to less income as you go through this patch.
The fact that a business consolidation loan helps with the very human problem of stress is often cited by our customers as the single biggest bonus, outstripping even the financial aspects of the loan.
7. Fixing Relationships
If you have been struggling with debt, you have doubtless put a strain on the business relationships you have. Companies that go through a difficult time will often upset their suppliers by struggling to pay bills, their customers by pushing for invoices to be paid sooner, and even potentially their staff with missed salary payments and a negative working atmosphere.
A debt consolidation loan will go a long way to rebuilding these damaged relationships and put your business in good stead once again.
The 4 Downsides of a Business Consolidation Loan
At Clifton Private Finance, we may recommend a business consolidation loan if you are struggling with multiple debt repayments, but there can be a few downsides to the process:
1. Increased Interest
When you take out a new loan for debt consolidation, you may find that the interest rate on the loan is not quite as favourable as all of those you are replacing. A lot will depend on your business credit rating at the time of taking the business consolidation loan but decisions may have to be made whether the loan is the right path or not if interest is particularly higher.
Often, it is worth including only existing debt that has a greater interest rate into your consolidation loan, leaving those with a beneficial rate to be repaid as normal. While this isn’t as administratively beneficial as a full consolidation business loan, it can make for superior long-term financial planning.
2. Limited Choice
Those businesses looking for consolidation loans often do so because they are struggling with a period of bad debt and a damaged credit report. In these cases, the choices of loans available to you may be limited and the products available in the marketplace are weaker than you may have hoped. There are two things worth considering if you are in this situation:
- Taking out a loan with the plan to refinance in the near future - This gives you the consolidation and all the administrative benefits immediately, and offers you a way to improve your loan terms in a few months once your credit score has improved.
- Speaking with professionals for advice - It is always worth discussing your consolidation business loan needs with an established business loan broker like us at Clifton Private Finance. With access to a wider marketplace of financial providers, as well as all the experience needed to select the best deals, speaking to us will help you get a consolidation business loan that truly helps.
3. Longer Terms
The majority of consolidation loans will stretch your debts over a longer term than your current financing. This is to help lower the monthly payments and ensure that the debt is properly manageable. However, the downside of this is that you will be making repayments for many months, or years, longer than your current situation.
4. Fees
Some loans will have early repayment fees associated with them and these should be considered when using a consolidation loan to pay them off. Other fees may also apply. We can provide an exact quote upon request depending on your situation and needs.
Business Loan Case Studies
What Can a Consolidation Business Loan Cover?
A well structured business consolidation loan will work to help put your business on firm financial ground, and many will cover not only your immediate debt service, but also ensure you don’t fall straight back into financial difficulties.
A consolidation business loan may be used to pay:
- Existing unsecured business loans
- Stretched lines of credit
- Asset-based finance and secured loans
- Defaulted asset finance, such as hire purchase and finance lease agreements
- Overdue and current supplier invoices (accounts payable)
- Outstanding utility bills
- Unpaid employee salaries and wages
The Difference Between a Business Consolidation Loan and Refinancing
Often the term refinancing is used incorrectly to represent a consolidation business loan. Though refinancing and consolidation are similar processes, the difference is clear:
- Bringing together multiple loans into one single debt for management and repayment is debt consolidation.
- Replacing a single existing loan with a new one to obtain more advantageous terms of repayment or interest is refinancing.
While both involve the repayment of a loan and replacing it with another, the difference between a consolidation loan and refinancing is key.
An Example of a Business Consolidation Loan
Imagine the scenario - you have been running your business for some years, but the last six months have been a real struggle.
You have slipped behind in paying credit card debt, your overdraft is stretched to the max with no sign of being reduced, and two current business loans have been late in payment for months; not only that, but utility bills and other regular payments are building up, you have used up every payment holiday you could wrangle.
Worst of all, though, this month you will struggle to make your salary obligations, letting down your loyal employees. The situation is bleak.
A business consolidation loan could solve these problems as shown in the following example.
First, consider the outgoings, here shown monthly with the amount being paid in interest and how much remains to clear the debt in total.
Example Outgoings (per month)
|
Outgoing |
Current Payment |
Interest Portion |
Outstanding Total |
|
Unsecured Loan A |
£1,000 |
£300 (~10% APR) |
£40,000 |
|
Unsecured Loan B |
£370 |
£60 (~6% APR) |
£11,500 |
|
Credit Card |
£700 |
£360 (~24% APR) |
£18,000 |
|
Overdraft |
ignored (no repayment) |
£160 (~19% APR) |
£10,000 |
|
Utilities etc. |
£2,000 |
N/A |
£3,500 late |
|
Salaries |
£6,000 |
N/A |
£0 |
|
TOTAL |
£10,070 + overdraft |
£880 |
£83,000 |
It can be seen from the data, that this business could benefit from a consolidation loan of £100,000. Not only would that repay all the outstanding debt, but it would provide £17,000 of usable capital. £6,000 of that would be immediately used to pay the month’s salaries and £2,000 for the current utility bills, meaning £9,000 would remain to help cashflow for the next few months and get the company back on track.
In looking for loans, the best terms offered (considering the company’s present financial situation and credit report) are 11.5% APR over 7 years. This would mean a repayment of £1,738.65 each month. The resulting changes for the business would be significant as follows:
Consolidation Business Loan Improvements (monthly)
|
Item |
Total |
|
Current debt service |
£2,070 |
|
Current interest paid |
£880 |
|
New consolidation business loan repayment |
£1,738.65 |
|
New consolidation business loan interest portion (11.5% APR) |
£548.17 |
|
Repayment stress reduced by |
£331.35 |
|
Interest paid reduced by |
£331.83 |
As can be seen, the real monthly financial stress on repayments is lowered by more than 15%, by almost £350 - a saving that is represented almost exactly by the drop in interest.
This could give the struggling business the fresh start it needed, helping it move forward with a significantly improved credit rating and none of the financial stresses that have been weighing down for the last six months. Seven years down the line, the loan will be completely repaid with nothing owing to any financial provider.
Staying On Top - Avoiding The Lines of Credit Trap
There is one significant trap for businesses using a consolidation business loan, and that is to lean back on the released lines of credit, replicating the whole problem in a few months - only with a larger loan to have to repay and no second chance of consolidation.
It is essential that these are not used without full consideration of the consequences, and that they are properly managed. Mismanagement of lines of credit following a consolidation loan can drive a business to greater financial difficulty and ultimately liquidation.
Some consolidation business loan providers may insist on the closure of existing lines of credit to help protect the business from this problem.
Applying for a Consolidation Business Loan
If you feel your business would benefit from a consolidation business loan, contact us at Clifton Private Finance. We have an expert team of consolidation specialists who will be able to analyse your current finances and debt service and offer the best consolidation loan for you.
Give us at Clifton Private Finance a call today to see how we can help.
