Running a business often requires different types of loans and debt for different reasons. It’s not uncommon to have equipment loans, construction financing, vendor credit, and credit card balances – requiring payments all at the same time.
Depending on the type of debt you have, it can lead to high interest payments and can also be difficult to keep track of so many different payment plans and due dates.
One potential solution for business owners is debt consolidation. Through a debt consolidation loan you can often reduce the amount of interest you pay on loans while consolidating everything into a single payment.
In this article, we’ll take a look at how debt consolidation works, what benefits there are for business owners, and how a community bank can help with the process.
How to Consolidate Debt
Debt consolidation is what happens when you take out a new business loan to pay off existing business loans and debts. Before looking for debt consolidation loans, start by assessing your debt and financial obligations.
These obligations could include short term loans, long term loans, lines of credit, vendor debt, and credit card balances. Once all financial obligations have been organized in one place, next you’ll examine the interest rates.
Debts with high interest rates should be prioritized for consolidation. By consolidating debts with high interest rates into a singular, lower interest rate loan, business owners can have access to immediate monthly savings and improved cash flow.
Once obligations with high interest rates have been identified, it’s time to apply for a debt consolidation loan. When applying, business owners should have a few key documents ready to improve their chances of approval.
- Accurate financial statements for a snapshot of the company’s health
- Business credit reports to show your history of paying back obligations
- A business plan that outlines how you’ll manage consolidated debt
Applying for a debt consolidation loan through a community bank, like Crown Bank, can also improve chances of securing lower interest rates. Community banks offer personal connection and local knowledge – and can expedite decisions to help local businesses succeed.
Once approval has been made for a debt consolidation loan, business owners should carefully review interest rates and repayment terms to ensure that consolidation will lead to an improvement over current debts.
Why Business Owners Should Consolidate Debt
Debt consolidation can act as a lifeline for a business in a variety of ways. Here are a few reasons why debt consolidation can be useful.
Keeping Things Simple
Business owners already have to keep track of so many financial metrics. Adding multiple types of debts, with their respective due dates, repayment terms, and interest rates can be a lot to manage.
Debt consolidation means you’ll only be making a single monthly payment, making it easier to manage liabilities and make payments on time.
Lower Interest Rates
When consolidating debt, you’re often securing a loan with a lower interest rate than the average rate of existing debt. This immediately lowers the amount of interest you have to pay for existing debts and free previously tied up funds.
Opportunities for Growth
Having multiple high interest loans drains a company’s cash flow.
Debt consolidation can open up liquidity for growth opportunities. This could come in the form of retaining employees, updating equipment, expanding, launching new products, buying inventory in bulk, or even acquiring new companies.
Debt consolidation offers a single monthly payment with a fixed repayment term and interest rate. Without the fluctuation of variable rates and terms, business owners can create more accurate budgets for future spending.
Accurate budgets lead to more informed decisions and long term financial stability.
Improve Credit Score
If you miss a payment on a loan, you’ll take a hit to your credit score. Carrying high interest loans can also reflect negatively on your score. Debt consolidation simplifies the process with a single payment and more favorable interest rates to help you reduce overall debt.
Through consistent, on time payments, business credit scores will improve over time.
Partner With a Community Bank
Debt consolidation can stabilize a business’s finances and improve cash flow. If you’re considering a debt consolidation loan for your business, or have any questions about partnering with a community bank, don’t hesitate to contact us today.
At Crown Bank, we take pride in partnering with Minnesota business owners. Even if debt consolidation is not for you, we can help you find the right opportunity to grow your business.