Planning for the future is an essential task for any business, but even carefully run businesses may experience unforeseen financial difficulties. One solution for dire financial problems is bankruptcy; however, this type of endgame solution isn’t always the best way to reduce excessive small business debt. Just as a business might create a business plan for times of prosperity, creating a plan for small business debt consolidation may make it unnecessary to file for bankruptcy.
Before Attempting Consolidation
Business debt may come from a number of creditors, accounts, and business partners, so creating a debt consolidation plan first requires the gathering of all information related to those debts. Speaking with creditors, lenders, or a debt consolidation company is premature unless the requisite paperwork has been gathered. Having this information on hand allows a business owner to create a priority list of debts and later, a plan to get rid of those debts.
Timeline for Completion and What to Expect
Most debt consolidation plans follow a similar timeline, whether a business uses a credit counseling service, a business lawyer, or handles the consolidation without professional guidance. Expect the following timeline during the debt consolidation process:
1. Undergo assessment of current debt
2. Create strategy for debt repayment or restructuring
3. Prioritize which debts on which to concentrate first
4. Devise budget needed for payments
5. Negotiate with creditors for repayment plans and settlements
The final step in this process is extraordinarily important because it could reduce the overall amount of payments required to satisfy debts. Consider, however, that settling with certain creditors could make it difficult to conduct business with those entities in the future.
Pros and Cons of Consolidation
A business will have a few different options on the table for reducing debt. Creating a payment plan with each creditor may be the solution for one company while a debt consolidation loan might be the best route for another business. One important consideration for businesses that apply for a debt consolidation loan is the amount of payment required each month.
A business currently struggling to make payments on many different debts could have just as much trouble keeping up with a single payment. However, allowing all debt to be combined into one payment could make it easy to avoid so many late payments. Putting the entire weight of the company’s financial might behind one payment could help reduce the need for bankruptcy.
Costs for Consolidation
Just like any other type of loan, a debt consolidation loan will come with an interest rate as well as service fees charged by the lending institution. Interest rates may vary significantly with different lenders with one bank charging 5 percent interest and another bank charging up to 20 percent interest.
When deciding upon a lender for a consolidation loan, ensure that each charge associated with the loan is clearly defined. Additionally, figure out the loan term, which suggests the number of payments required until the loan is satisfied.
Armed with the knowledge regarding the overall cost of a loan, a business owner will be able to determine whether consolidation would represent savings over making payments to separate creditors.
Qualifying for Consolidation Options
A debt consolidation loan for a business requires the same type of checklist that would be needed for a regular loan. A business must provide a business plan as well as submit to a credit check.
Impact on Credit Rating and Reputation
The impact on a business’s credit rating will vary depending upon how a business chooses to pay off debts. For example, agreeing upon a settlement may allow for faster debt reduction; however, a creditor may note on a credit report that payment of less than the full balance satisfied the debt. Paying off debts is important for improving and retaining credit score, but certain payment agreements could make it difficult to secure credit in the future.
Deciding Whether to Consolidate
One impressive benefit of debt consolidation stems from the ability of a company to retain workers and continue paying employees. Bankruptcy often requires a liquidation of assets and a significant reduction in staff. Recovering from bankruptcy is incredibly difficult when the company’s workers have been laid-off. Debt consolidation might be the best way to keep a company’s employees intact.
The decision to consolidate debt is not the same for every business. The costs of consolidation and the expected results must enter into all final decisions on consolidation, bankruptcy, or restructuring.