Managing multiple business loans can be overwhelming, so you might be wondering: can I combine them all into one?
In this blog, we’ll explain what business debt consolidation is, how it works, and what to think about before deciding.
Can you consolidate business debt?
Yes, you can consolidate business debt. This involves taking out a single loan, called a debt consolidation loan, to pay off multiple existing debts. This simplifies your finances by combining them into one monthly payment and may help reduce stress.
You may also benefit from better terms, such as a lower interest rate or reduced monthly payments. However, it’s important to be aware of the risks, like extending the loan term could mean paying more in interest overall.
What are your business debt consolidation options?
There are different ways to consolidate your business debts. The best option depends on your situation. Here are some common choices:
- Further advance on your mortgage: Some lenders let you borrow extra money on your existing mortgage to help pay off debts. If your lender offers this and the terms are good, it can be a simple solution.
- Remortgaging to release equity: You could switch to a new mortgage and borrow more than you currently owe. This extra money can be used to pay off debts. This works well if your current mortgage deal is ending soon. However, it may not be worth it if you’re already on a low rate or would face early repayment charges.
- Secured loans: This type of loan uses your property as security. Because of that, lenders often offer larger amounts and lower interest rates. But there’s a risk, if you can’t repay the loan, your property could be at risk. They're also often known as homeowner loans or second charge mortgages.
- Unsecured Loans: With an unsecured loan, you don’t need to use your property as security. This can feel safer, but these loans often come with higher interest rates and may be harder to get.
Why consider consolidating business debt?
There are several reasons why you might consolidate business debt:
- Simplified payments: It means one loan, one payment, and one due date. No more juggling multiple repayments, which can reduce the risk of missed payments.
- Potential for lower interest rates: Depending on your credit profile, you may qualify for a lower interest rate. This could mean smaller monthly payments or reduced overall interest.
- Improved cash flow: By extending the repayment term on the new loan, you might lower your monthly payments. This could give your business more breathing room and cash flow.
- Boost to your credit score: Paying off multiple loans can have a positive impact on your credit score, especially if you stay on top of your new payments. Over time, this may help you qualify for better finance options.
What are the risks of business debt consolidation?
While it can be a useful tool, it’s not without its risks. Here are a few things to consider first:
- You might pay more in the long run: Extending the loan term can reduce monthly payments, but it may increase the total interest you pay over the life of the loan.
- Collateral may be required: If you are looking to get a secured loan, you will be putting your property up as security. This means if you default on the loan, it could be at risk of repossession.
- It doesn’t fix financial habits: If your debt was caused by overspending or unpredictable cash flow, consolidation alone may not solve the problem. It’s important to look at your budgeting to avoid falling into the same cycle.
- Not everyone will qualify: Lenders assess your credit score and business revenue to determine whether to let you borrow money. If these don’t meet their criteria, you may struggle to find an option.
Summary
Consolidating your business debt may help you get more control over your finances. By turning several loans into one, your payments may become easier to manage. But it’s not the best choice for everyone. You might end up paying more in the long run or have to use your property as security.
Before you decide, take a good look at your debts and think about what type of loan (if any) could help. If you're not sure, a financial advisor or broker can guide you based on your situation.
Loans are secured against property. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
