Business debts can be a huge millstone around the neck of even the most impressive entrepreneur. Lending money to grow your business is all well and good, but it’s important that the size of your monthly repayments does not reach a point where it affects your profit margin and, worse still, your ability to borrow in the future.
In general, small firms take out business loans for quick-turnaround finance to enable them to grow. Other start-ups may be required to secure short-term debt as their finances or credit score wouldn’t enable them to secure anything better. As time passes and, hopefully, your business grows, you can then consider consolidating your business debt to secure better interest rates, repayment schedules and extended repayment terms. Let’s take a look at some scenarios when you’ll know it’s the right time to consolidate your small business debts.
Improvements to your personal credit rating
As a sole trader or freelancer, if your individual credit score has risen since you last borrowed money, you might consider this a good opportunity to consolidate your existing business debts. Higher credit ratings will almost certainly help you to qualify for lower interest rates and lengthier repayment terms. The best credit cards for balance transfer and the consolidation of monthly repayments generally require credit scores of 700 and above, with 0% interest for up to 18 months with some lenders.
Improvements to your business’ credit rating
If you’re choosing to borrow money under your business name, it’s important to demonstrate to lenders that you are a responsible borrower. Most lenders will review your business credit report to determine your creditworthiness. Generally, lenders want to be reassured that your business doesn’t always max out its credit lines. If you’re already not using a large chunk of your credit line and you have a positive payment history, you’ll be in good shape to reconsolidate your debts at much-improved rates and schedules.
Healthier personal finances
If your freelance or self-employment takes an upturn in fortunes, you will almost certainly have a better chance of consolidating existing business debt. Lenders will be pleased to see an increase in your annual income or additional sources of income, as well as a steady reduction of the existing debt you wish to consolidate. If you’re a sole trader looking to consolidate debt, be sure to check your personal credit score from time to time to make sure you meet the minimum threshold for consolidation applications.
Healthier business revenue
Similarly, if your limited company is thriving and you’re wanting to renegotiate financing terms for your business’ existing debt, a successful previous financial year will certainly look good in the eyes of lenders. Be prepared to demonstrate your latest tax returns to demonstrate your improved profitability. If your company has managed to lower its outgoings elsewhere, this will also be looked upon favourably.
Business milestones reached
As a general rule, most lenders will be more confident in offering debt consolidation to businesses that have been operational for longer. For instance, if you have survived and thrived for more than two years, this should be a good indicator to lenders that you are a credible business and a suitable candidate for renegotiating repayment terms.
Refinancing your existing small business debt is a positive step for any growing firm. Not only can it lower monthly repayments, it can allow for additional borrowing to provide further working capital to deal with the unexpected or to acquire additional much-needed equipment to expand.