Is a consolidation loan right for you?

Small business consolidation loans may sound great for entrepreneurs tired of paying single loans individually. Getting this loan helps you deal with only one lender as you get the money to pay off all the small loans you may have borrowed in the past. Before you apply for this loan, you need to determine that it is the best option to help you save. Qualifying for a consolidation loan is not easy since your business has to meet specific requirements.

The consideration that you should make before choosing this option are as follows. Look at the interest rates of your current loans. If you are already paying low interest on your existing loans, a consolidation loan with higher interest rates may not be the best option. Your credit score determines if you can qualify for the loan. As you look for a larger loan to help you clear small ones, download your credit report and confirm that it is error-free. Do this before applying for the consolidation loan.

You can also get a consolidation loan with low-interest rates if you try to improve your business finances. Your business should be gaining more than it spends on. You should also ensure that you don’t have any prepayment penalty on the existing loans. This can make the method quite expensive.

Determine the sum of your current debt and see if consolidating it is the right step. Get the average of the annual percentage rate of all the existing loans you want to consolidate. The new APR for the consolidation loan should be less than the average APR of all of the loans. Remember that you still have to continue making monthly payments on the new consolidation loan. Plan on how you are going to achieve this before you think of applying for the new loan.

After such considerations, weigh the merits of consolidating debt versus its demerits for you to determine if it is the right step for your business. Though the loan can benefit your business, it can pose some risks.

The merits of a consolidation loan

Many people choose consolidation loans for their business to help them manage repayments. Making only one monthly repayment becomes easier than making several ones. This loan, therefore, simplifies bookkeeping. If you get a consolidation loan that has low-interest rates, you can improve your cash flow. It helps you access more free cash flow that you can use to fulfill other business needs each month. This is better than paying single loans that have high-interest rates monthly.

What are the drawbacks of applying for a consolidation loan?

Consolidating business debt comes with compound interest. You have to pay what you already owe on the first loan, including both the principal and interest. Even if you find a consolidation loan that has low-interest rates, you cannot avoid paying compound interest. Since these loans are long term, there is a likelihood of paying more in interest throughout the life of the loan.