If your small business has suffered recently you’re not alone. A recent survey by Simply Business found the average small to medium enterprise (SME) in the UK has had a loss of income over £11,000. The worst-hit regions being Scotland and the North East.
For Britain’s six million SME’s there is chronic uncertainty and firms may have to take out loans to keep afloat. If your company already has arrears, this could be pushing you into more worrying levels of debt.
A consolidation loan is often a favoured debt solution when businesses or individuals begin struggling with multiple debts. To make an informed decision about whether this is right for you, we’ve compiled a detailed list of everything you need to know about consolidation loans.
What is debt consolidation?
Debt consolidation is when you convert debts with multiple creditors into one sum owed to a single creditor. By borrowing enough money to cover the debts you already owe, you will then only have to repay one lender. This does not reduce the debt but transfers it to one creditor which could simplify business operations.
What are the benefits of debt consolidation?
Simplifies business expenditure
There are already so many different costs and expenditures involved in running a business. Having debts with multiple creditors will only add complications. One monthly outgoing is far easier to keep track of and could reduce time spent auditing accounts.
Improves cash flow
You may be able to find a consolidation loan with lower interest rates than your combined debts or one which allows smaller monthly repayments. This could leave you with some extra money at the end of every month to reinvest into the business. Alternatively, you could save it to ensure you have a security net for unexpected costs and emergencies.
Improve credit score
If you take out a loan and start repaying it on-time to your debt consolidation lender, your credit score will start to improve. If it had been damaged from falling behind on your previous debts this could be an opportunity to significantly improve it.
If you have saved money on interest and improved the cash flow of the business you may be in the position to reinvest it in the company. Once you’ve successfully paid off your consolidation loan you will have also built up your credit score. This means you are more likely to be accepted for a loan in the future which you can use to further expand the business.
What are the risks of debt consolidation?
Having spoken about the benefits of debt consolidation it is also important to be aware of the risks which could come with these kinds of loans.
If you continue to borrow while still paying back your loan, this could push you further into debt. Moreover, if you start to default on payments then you will continue to harm your credit score and you could end up in a worse position.
It’s important to check that the interest on your consolidation loan will end up costing you less than your previous debts combined. You need to make sure the interest is not only lower than all your other previous debts but if you’re repaying over a longer period then it won’t end up costing you more. If it ends up costing you more in the long run, debt consolidation is not the right solution.
Secured consolidation loans
There are two different types of consolidation loans: secured and unsecured. Secured loans are when the debt is fixed against an asset, usually your home. The benefit of this is that you are more likely to be accepted but if you fall behind on repayments you could lose your home. It is not advisable to fix a loan for your business on such an important asset.
Can you get a debt consolidation loan with bad credit?
It is possible to get a consolidation loan with bad credit. Often, they come with higher interest rates than most loans. However, lenders will also consider other factors such as job history and income before choosing whether you qualify.
What is considered a ‘bad credit score’ varies across different lenders. Just because you have been rejected from one lender doesn’t mean you won’t be accepted anywhere else. They all use different criteria so the only way to know if your eligible is to apply for one. Applying will have no impact on your credit score, even if you get rejected.
Where to get a consolidation loan?
If, after weighing up the various advantages and disadvantages of a consolidation loan, you decide this is the right decision, you will need to find a lender and apply. There are many lenders out there and most will let you apply online.
Even if you don’t get a consolidation loan, getting in contact with a financial advisor means they can give you guidance on the best solution for your circumstance.
This article was provided by Tom Chapman, content manager at Consolidation Express. A UK-based personal consolidation loan broker, the company – and its advisors – have a wealth of knowledge when it comes to debt consolidation for individuals. It, however, does not work with any lenders specialising in business finance. As a result, those looking for consolidation loans for companies should seek advice from another specialist organisation.