Updated: 24 September 2020
From credit cards and overdrafts to loans and cash advances, business debt can take many forms. Missing out on the best rates can be costly, but keeping track of various costs and fees is time consuming. As a result, many business owners choose to consolidate their debts. To help you understand what this means, let’s take a look at how this works.
Consolidating debt means combining multiple debts into one single debt. You might have various different products with different providers, or multiple loans with the same provider.
For example, John has a business credit card with Barclays, an overdraft with Natwest and an asset finance loan he’s taken against a piece of equipment. By consolidating these debts, he pays them all off and replaces them with one single loan.
Suzy on the other hand has taken two business loans with the same provider. She now wants a third to invest further in her business. Rather than having three different rates and monthly repayments, she can choose to consolidate them all into one loan.
The key benefits to consolidating debt are the ease of having a single monthly repayment, a more affordable monthly repayment or a lower cost overall.
One monthly repayment
As a result of consolidating your debts together, you’ll replace them with one monthly repayment. For busy business owners, this makes it easier to manage and plan your cash flow. It can also reduce the risk of missing repayments.
Lower monthly repayments
Depending on the loan terms you choose, consolidating debt can reduce your monthly repayments. By stretching your loan over a longer period of time, your repayments will go down. This can help ease your cash flow, but can lead to higher costs in the long run.
Consolidating can also help lower the cost of your debts. Particularly if you have multiple products with different providers, you may be getting charged overdraft or credit card fees, or high rates of interest. As well as simplifying your debts, an affordable business loan can reduce the combined costs of these rates and fees.
Likewise if you have just one loan, you could come back for further finance with the same provider and get a lower interest rate. If your business has grown or improved its financial position, you may qualify for a lower rate. By consolidating you’d then get the new lower rate on your existing loan.
When it comes to managing debt there’s nearly always a trade-off. Consolidations are no exception. It’s important to understand what they are so you can make the best decisions for your business. Some of the potential downsides to consolidating are:
Increased overall costs
Consolidating your loans together can be the more expensive option over the lifetime of the loan. Say you’ve chosen to consolidate all your debts into one loan, repaying monthly over 5 years. Your repayment is now lower and your cash flow is easier to manage. However, the interest you’ll pay over 5 years could mean it’ll cost more in the long run. It may still be a good move for your business, but it’s important to understand the costs involved.
When you take out a loan to consolidate your debt, there will typically be a charge to do so. The fee will depend on the provider and the type of loan you take. Again this can make consolidating cost more than keeping debts separate, so you should look carefully at the fees involved and make the best call for you.
For many business owners, the option to repay a loan early gives them important flexibility. However, some providers only allow you to settle loans early if you do so in full. By consolidating multiple debts into one loan, that new loan is larger, which may be harder to pay off in one go should you want to repay early.
At Funding Circle, consolidations typically take two forms:
In either scenario they may be looking for a better interest rate, lower monthly repayments, or simply an easier way to manage their cash flow. The fee and interest rate charged will depend on various factors, including the amount you want to borrow, your loan term and your credit rating.
When coming back for further finance your interest rate may go up, down or stay the same. Whatever the situation, your Account Manager will explain all the details when you apply and be on hand to answer any questions.
If you’re looking to consolidate your business debt, you can check your eligibility for an affordable, fixed-rate loan in just 30 seconds at fundingcircle.com.