How does business debt consolidation work in Australia?
When you have multiple debts in business it can be overwhelming. For business owners, making several payments on existing loans can be distracting. For some types of debts, such as credit cards, missing a payment can result in penalties and a higher interest rate in the long term. When you are approved for a business debt consolidation loan, you use the funds from the loan to pay off all other debts. Sometimes, the lender will pay off the debts for you to ensure they are paid. As a result, you will make a single payment to one lender instead of making payments on multiple loans.
When should you consider consolidating your business debts?
This will depend on your personal and business financial circumstances. When your financial situation changes for the better, it could be the time to look at business debt consolidation. You might have taken on various debts at a time when you were not as financially stable, such as having cash flow problems. Also, you might have had a poor credit rating which has improved over time.
Business debt consolidation benefits
Business debt consolidation can provide several benefits:
- Simplify your business finances: You only have to make one payment and deal with one lender. This means you will no longer need to keep track of paying multiple debts. For small business owners, the last thing they need is to complicate their finances by having to make several payments each month. It will also be easier to track your progress when all your debt has been combined into one business loan.
- Save money: If your financial situation has improved, you will likely be able to get finance at a lower rate. As a result, consolidating business debt can save you money. Since time is money, you can spend your time on more productive efforts instead of managing business debts.
Business debt consolidation shortcomings
- Challenge getting business loans: Even if you have a good credit score, some types of business loans require collateral, such as residential or commercial property. Another challenge is the amount of paperwork required for traditional bank loans. In addition, many lenders won’t offer finance if your existing debts include tax debt to the ATO.
- Extended payment terms: If you consolidate your debts, it might mean the loan repayment period (loan term) is extended. By extending the payment period, you could end up paying more interest in the long run. However, with one loan, you will have a clear picture of what you owe and when you will repay it.
Points to consider for debt consolidation
- Loan terms, interest rates and fees: When considering a business loan to consolidate your debts, you will want to know the cost and how long it will take to repay the debt. For online business loans, SMART Box™ is a business loan comparison tool that shows the pricing metrics, including the annual percentage rate and total cost of the loan.
- Your ability to make repayments: If you agree to make repayments weekly, fortnightly or monthly, you will want to be sure that you have the cash flow to do so. With credit cards and lines of credit, you have more flexibility. When you consolidate into a loan with regularly scheduled payments, you won’t have this flexibility. In the long-run, this could be the right option because it sets the discipline for repaying debt.
Options for consolidating business debt
There are several options for business debt consolidation loans in Australia. If the aim is to repay the debt, it might be better to focus on loans that require regular repayments and have an end in sight. Revolving credit facilities, such as business overdrafts and business lines of credit, don’t have a set payment schedule with an ending date, so it can be tempting to keep an ongoing balance and not reduce the debt outstanding.
Some business owners use personal loans or top up their home loans to consolidate business debt. Although this can be a viable option, using personal finance for business purposes isn’t recommended. First, by using personal finance for business purposes won’t enable you to build a business credit history. This can be important for obtaining business finance in the future. Second, mixing business and personal finances can complicate your accounting. For example, using a home loan to consolidate business debt can complicate your business taxes when trying to determine which portion of the loan interest is tax-deductible as a business expense.
Online business loans are one form of business finance that has been growing in popularity as a way to consolidate business debts. With Moula, for example, the application can be completed within ten minutes. Unlike traditional business term loans from a bank, you are not required to complete large amounts of paperwork. Instead, Moula safely and securely accesses your bank transaction and/or accounting data to make a lending decision. Once approved, the funds are available by the next business day. Use our business loan calculator to see potential loan repayment schedules based on the interest rate and the amount you want for a business debt consolidation loan.