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    Want to Consolidate Your Business Debts? Here’s What You Should Know

    A sudden change in the cash flow of your business could make it difficult for you to service your business loan accounts. The same could happen if for any reason, the interest charges on your loans were to suddenly increase.

    In such a situation, you could consider any of the two options – debt consolidation of multiple loans with a single term loan or line of credit, and debt refinancing. We’ll discuss the basic difference between the two options at a later part of our article. Right now, let’s see how you can consolidate your business debts.

    Steps to Consolidate Business Debt With a New Loan

    Want to reduce the cost of borrowing or enjoy a better repayment schedule? Here’s how you can consolidate your business loans with a single loan:

    Understand the Terms of Your Debts

    Before, you go ahead with the process, you should understand whether you can or should consolidate all your business loan accounts. You could realise that the costs of prepaying a loan could cancel out the benefits of consolidating it. You could also realise that the interest charges on the current account is lower than the new loan. In such a case, you would be better off without consolidating this loan.

    Some lenders could charge unusually high early settlement fees or could have other terms that make loan prepayment unjustifiable. You need to understand the terms of a particular loan before you go ahead with the process of consolidation.

    Choose the Right Lender and the Right Loan

    Your whole purpose of debt consolidation could fail if you can’t pinpoint the right consolidation loan from the right lender. Don’t lose sight of your objectives. You need a loan that can offer one or more of the following:

    • Lower interest rates.
    • Flexible repayment schedule.
    • Lower monthly instalment.
    • Longer tenure.

    If the new loan doesn’t help with your objectives, it would clearly be counterproductive to consolidate. Hence, it’s imperative for you to focus your search on the right business loan.

    Make Sure You Meet the Eligibility Criteria and Have the Right Documents

    A business loan, whether secured or unsecured, usually involves a far more stringent eligibility assessment than a personal loan. These loans also have longer approval periods. The worst thing is probably to wait for 15-30 days after applying to realise that your application was rejected because you didn’t meet the eligibility requirements or hadn’t submitted the necessary documents.

    Make sure you meet the criteria for eligibility. Have the supporting documents ready before you apply. Some of the documents required could be:

    • ID cards of the proprietors, partners, and/or guarantors.
    • Financial statements of the company.
    • Notice of Assessment issued by the Income Tax Department of Singapore.
    • Current account statements.
    • Statements of existing credit accounts.
    • Proof of operating income and debt service coverage ratio. If the ratio is lower than 1, it indicates a negative cash flow, meaning that you won’t be able to service your current debts without borrowing from external sources.

    Some of the other considerations could be:

    • The age of your business.
    • The age of your active credit facilities.
    • The credit utilisation ratio of your business.
    • Equity in real estate which is nothing but the market-assessed fair value of your properties minus the outstanding on a loan they are pledged to.

    Let us now look at the advantages of debt consolidation for business loans.

    Why Business Debt Consolidation Could Make for a Smart Decision?

    Here are some of the most pertinent reasons for considering consolidation of business debts:

    Easier Management of Cash Flow

    When you consolidate multiple loan accounts into one, it eliminates the hassle of dealing with multiple lenders and simplifies your business cash flow. You can focus on one monthly payment instead of many and allocate funds for one instead of multiple loans. Improved cash flow could also mean more working capital for your business.

    Lower Interest Commitment

    One of the most obvious reasons for debt consolidation is to enjoy lower interest charges. This could also reduce your monthly instalments, meaning you could possibly allocate a greater share of the budgeted capital for business expansion and other productive needs.

    Lower interest charges could also mean that a higher percentage of your monthly payments would be used for paying down the loan principal rather than simply settling the interest expenses. This could also help you to become debt-free faster.

    Free Up Your Revolving Credit Facilities

    If the outstanding debts on your business credit cards or lines of credit become too high, you’ll no longer be able to enjoy interest-free borrowing. If you can transfer the debt to a new loan, you could essentially free up these revolving debt facilities. Once the slate is clean again, use these cards to pay your utility bills and other regular commitments. If you repay the dues on your card in full during the interest-free period, you can essentially borrow without any interest cost. This could be a great way to maximise the return potential of your card spends.

    Get New Loans for Your Business

    Every single business needs money to expand and operate in an unhindered manner. However, if you’re too deep in debt, you may no longer qualify for new loans. However, if you can consolidate multiple loans with a single credit facility, you may be able to improve your cash flow and reduce your indebtedness. This is usually seen as a positive step by most lenders.

    Many lenders could be willing to offer fresh funds to you once you demonstrate an improved cash flow.

    Improved Credit Health

    A lower number of active loan accounts could establish that you require less credit. This could be seen as a positive development for your business. Also, having too many overleveraged credit facilities isn’t the best case scenario for a business. By consolidating your outstanding debts with a term loan that offers a higher credit limit and a lower interest rate, you may be able to improve your credit score.

    Longer Loan Repayment Period

    One of the most common objectives of business debt consolidation is to qualify for a longer loan tenure. Lower interest rate and a longer tenure could mean lower monthly payments. This could diminish the stress on the cash flow on a short-term basis and free up cash for other aspects of the business.

    When Should You Consolidate the Outstanding Debts Owed by Your Business?

    The effectiveness of debt consolidation usually depends on the timing. If you can time it right, you could save a lot of money and see an uptick in the credit score of your business. Here are some of the indicators that you should look for before opting in for a business debt consolidation loan:

    • Your business has successfully completed a few years.
    • Your business has a stable cash flow.
    • There is a clear improvement in business revenue versus cost ratio. If it is not evident, check your tax records. A more stable and increasing tax figure is an indication of revenue expansion vis-à-vis expenses.
    • For small businesses, improvement in health of the personal finances of the business owner(s) could also indicate an improved environment and a good time for consolidation of business debts. This is especially true if you use a secured loan for debt consolidation. That’s because improved personal finance could make it easier for you to be the guarantor or to pledge a valuable asset for the realisation of the loan.
    • Get a financial advisor to assess the quality of your credit health. If the score is stable and if there is no imminent danger of bankruptcy, you could consider a new loan for business debt consolidation. In addition, if there are no pending tax claims against you, it could indicate an improved financial landscape for your business. This in turn could indicate that you should go ahead with debt consolidation, if you’re contemplating it as an option.

    Don’t forget to do the math. Consolidation of multiple loan accounts with a new loan would make sense if and only if the terms are significantly better and more flexible. You could even seek the professional opinion of a financial advisor to compare the benefits of the new loan versus the old ones.

    Let us now understand the difference between debt consolidation and refinancing.

    Also Check: Debt Consolidation Refinancing

    What Is the Difference Between Debt Consolidation and Refinancing? Which Is Better?

    Although the two concepts may seem to be similar, they are not exactly the same. While debt consolidation generally involves consolidating multiple debts with a single loan, debt refinancing is about replacing an existing loan with a new one that offers a better deal.

    A better deal could be in the form of lower interest rates, more flexible payment options, or longer tenures. Refinancing, unlike debt consolidation, usually doesn’t involve multiple existing loan accounts.

    It’s difficult to say whether debt consolidation or refinancing will serve you better. It would depend on the benefits offered by the new loan. Also, as discussed before, you’ll first have to ascertain whether a lender is willing to let you consolidate all the existing loans that you have and whether it makes sense to opt for it. You may even opt for a combination of consolidation and refinancing.

    For small businesses in Singapore, personal loans could be a viable alternative to business loans. However, you can’t get a DCP loan for business debt consolidation. Spend some time online and talk to financial experts to understand your best options for business debt consolidation.

    Once you find the right solution, it would only be a matter of time before you see improvement in the operating climate of your business.

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