A small business owner could make the mistake of overborrowing. Before you know it, your monthly loan installments could be swallowing up most of your extra cash, leaving you little for your company’s other needs. If this happens, is there a way out? How can you get your business back on track? A debt consolidation loan may provide an answer.
What is a debt consolidation loan?
The principle behind a debt consolidation loan is very straightforward. It involves taking out one loan to pay off all your other loans.
Let’s examine how debt consolidation loans work:
Consider a situation where you have five loans that have outstanding balances:
|Outstanding loan balance||Installment date|
|Loan 1||$3,000||4th of every month|
|Loan 2||$27,000||5th of every month|
|Loan 3||$8,000||18th of every month|
|Loan 4||$14,000||23rd of every month|
|Loan 5||$4,000||24th of every month|
You could take a loan of $56,000 and use the money to pay off all five loans. Now, instead of having to pay five installments every month, you would be required to make a single monthly payment.
Paying once a month instead of on five different dates is more convenient. It would give you the time to focus on those activities that are important for your business. But convenience isn’t the primary advantage that a debt consolidation loan provides.
If you are careful about the lender you select, you could borrow funds at a rate that is lower than the one you are currently paying. This could save you a significant sum every month. Additionally, a debt consolidation loan with a long repayment period could help to lower your monthly installment leaving you more cash for your business operations.
Some entrepreneurs don’t like the idea of taking on a debt consolidation loan. They reason that borrowing more money when you are already struggling with your existing debt doesn’t make any sense. However, a debt consolidation loan can provide a solution to your financial problems. But you have to ensure that you adopt the correct approach.
Here is what you should do
Steps to prepare for a debt consolidation loan
A debt consolidation loan can help you to lower your effective interest rate, reduce your monthly repayment amount, and give you more time to meet your financial obligations. Here are the steps that you should take to achieve these objectives.
1. Calculate how much you owe
Start by making a list of all your company’s debts. This is the information that you should collect:
⇨ Name of the lender and the amount that you owe
⇨ The interest rate for each of the loans
⇨ Repayment period
⇨ Prepayment penalty that will be imposed by the lender
Now that you have this information, you can proceed to the next step. But before you do this, a word of caution is necessary.
The interest rate on your debt consolidation loan should be lower than the rate that you are currently paying. If it isn’t, it’s advisable to look for a lender who will offer you a low-cost debt consolidation loan.
2. Check your finances
This is a crucial step. You should know that your credit score is directly related to the interest rate on your loan. A higher score will usually entitle you to a lower rate of interest. Of course, every lender will carry out a thorough credit review before deciding on your loan eligibility and the rate of interest that will be offered to you.
What is your FICO score, and what does it mean?
|FICO score||Rating assigned by FICO||Description|
|Less than 580||Poor||This score indicates that you are a risky borrower.|
|580-669||Fair||A score that’s below average, but it’s likely that you will be able to raise a debt consolidation loan.|
|670-739||Good||If you have a score in this range, your chances of raising a loan are much higher. You are likely to be able to command a relatively low rate of interest.|
|740-799||Very Good||At this level, you shouldn’t have a problem raising a low-interest loan.|
|800+||Exceptional||You’ll probably have lenders queuing up to advance funds.|
Want to know your credit score? Take a look at the Credit Karma site. You’ll learn how to obtain your score at no cost and also pick up a lot of other useful information.
There’s another important consideration that you must take into account. How much can you afford to repay every month? Carry out this calculation carefully. You will have to work out the amount of cash that your business collects every month as well as your monthly cash requirement. The sum that is left over could be used to repay the installments on your proposed debt consolidation loan.
When you sit down to estimate your revenue and your expenses, you should be conservative. If you think that you will have, say, $1,000 every month to meet your debt repayment obligations, limit your borrowing to a sum that requires you to pay only $800 every month. This will give you a cushion to take care of unexpected expenses.
3. Check debt consolidation programs/loans
Now that you know how much you can afford to pay every month to the lender who provides you with a debt consolidation loan, you can start your search.
Don’t forget that:
⇨ You should look for a loan that will lower your current cost of borrowing.
⇨ In addition to this, the repayment period for your debt consolidation loan should be longer than the period for your existing debt.
If your new debt consolidation loan meets these two conditions, it will have a positive effect on your company’s cash flow
How can you get a loan that provides you with the lowest possible rate of interest? If you have a high credit score, you have far greater chances of borrowing at rock-bottom rates. A credit score of 720 would probably get you a loan at a 6% yearly rate of interest.
Do you want to know where you stand? Camino Financial offers loans to small business borrowers. You can use a business loan for debt consolidation, and thus payoff your existing business debt directly.
You can start by using our business loan calculator to arrive at the numbers you need and calculate the monthly payment that makes sense to you. Then, you can check if you prequalify instantly for one of our loans by submitting this simple form.
If you are planning to raise a debt consolidation loan, take out a little time to understand How Camino Financial Small Business Loans Work.
4. Check the lender requirements
The financial institution that you approach for a debt consolidation loan would review your application to see if it meets their eligibility criteria. What will the lender look for in your application? Most lenders will need the following information:
⇨ You will have to provide your basic financial records. This will include your bank statements and your balance sheet and income statement.
⇨ How long will has your business been in existence? A longer period works in your favor.
⇨ What are your yearly sales revenues?
⇨ Can you provide collateral? These are assets like your car or the machinery that you use in your business, which will be considered as security for the loan. If you can’t pay, the lender can seize the collateral and sell it to recover the money that you owe.
What if you don’t meet the lender’s eligibility criteria? If you find yourself in this situation, you may need to find other alternatives to pay off your debt.
5. Start paying off debts through your debt consolidation loan
When your debt consolidation loan is approved, and the money is transferred to your bank account, repay your existing lenders as soon as you can.
The bottom line
The process of consolidating your debts can be complicated. But if you proceed methodically, there is no reason why you shouldn’t be able to successfully merge all your loans into one. This can help you to lower your interest rate, reduce the amount that you need to repay every month, and boost your company’s profitability.
Here are some tips on how to succeed with your debt consolidation program:
⇨ Don’t deviate from your original plan to pay off all your debt. You may have to introduce some financial discipline into your operations, but in the long run, it will be worth the effort.
⇨ When you receive your debt consolidation loan, you will suddenly have a lot of cash in the bank. Don’t misspend it. Use it for the purpose that it is intended for — to pay off all your other loans.
⇨ Don’t be in a hurry to choose a lender. Study each proposal carefully and read the fine print. Remember to select a loan that doesn’t carry any prepayment penalties.
⇨ Camino Financial could be the lender that you are looking for. Establishing a relationship with us will lead you to better rates: after 9 months of timely payments, you can graduate to a second loan for a larger amount and at a lower interest rate. This will help you maintain reasonable monthly payments down the line and stay on top of your debt. Remember we don’t require collateral to guarantee your loan, and there are no prepayment fees if you decide to pay off your loan at any time. To start the application process, you don’t need a minimum FICO score or a credit history. At Camino Financial, we live by our motto, “No business left behind.” We will do everything within our power to provide you the money you need to run your business successfully and grow.
All you have to do is to complete the details on this form to know if you are prequalified for a loan. This won’t affect your credit, and soon after you submit your form, a business loan specialist will contact you to guide you through the process.