Is Your Small Business In Debt? Debt Consolidation Can Help
If you fear that you need to file for bankruptcy, it's important to consult with a bankruptcy attorney or another financial professional. You may not need to file for bankruptcy; some people are able to consolidate their debts.
What Is Debt Consolidation?
If this is your first small business, one thing you may be overwhelmed with is multiple debts with different balances and interest rates. With consolidation, instead of paying each debt off separately, you will combine the debts into one monthly payment. To help pay the debts off, you will need to take out a business loan.
Not only will consolidation make the debts more organized, but it will also reduce the final interest rate. For instance, your credit card debts likely have a higher interest rate compared to other debts. When the credit card debts are consolidated, then their interest rate could potentially decrease. While your payment plan will typically be longer, the great benefit is that your monthly payments should be much more affordable since you'll have a lower APR.
How Do You Get Started With This Process?
You and your attorney should discuss which debts you'd like to consolidate. For example, if you already have a good interest rate on a debt, then you may not want to consolidate it.
Once you've decided which debts should be grouped, it's time to explore consolidation programs through different lenders. Some lenders may not be willing to work with you, but those that lend to startup companies are a good bet. These lenders know that their lendees are high-risk investments, since about 50% of all startups fail within their first four years.
After finding a lender, you will likely qualify for a small-business administration (SBA) loan. These loans can be used for business equipment, inventory, real estate, working capital, and the like. When qualifying for an SBA loan, you have two main options: secured and unsecured loans.
Similar to a personal loan, you will put up collateral—like a car—so that you can get a better rate on your loan. However, you may not qualify for a secured loan if you are already dealing with debt. Many lenders require higher annual revenue and stable ownership (e.g., you've been in business for a few years).
Many small businesses can qualify for unsecured loans since no collateral is required. However, the interest rate will likely be higher than a secured loan. However, if your credit history has always been good, then you and your attorney can fight for a lower interest rate.
Once you've found a program you like and qualify for a loan, it's time to start paying off those debts! Although each program is different, it usually takes business owners between three and five years to pay off their debts through consolidation programs.
Is Debt Consolidation Always Better Than Filing for Bankruptcy?
Debt consolidation isn't always better than filing for bankruptcy; because debts are consolidated, some people get a false sense of security and fall behind on payments.
Plus, filing for bankruptcy may be better, depending on your long-term situation. For instance, if you aren't invested in your business any more and don't plan on running it within the next five years, you may want to consider Chapter 7 bankruptcy, where you effectively liquidate your assets and wipe the slate clean.
Some business owners have far too much debt, so consolidation just wouldn't be practical in the long run. If this is the case for you, contact a bankruptcy attorney for help with considering other options.
For more information on business loans, debt consolidation, and bankruptcy, contact qualified attorneys in your area.