Getting approved for a business loan is an exciting turning point for anyone who wants to start a business. Eventually, however, the realities of running a business and having a fixed loan payment each month on top of the invoices for utilities will feel a bit more real. The loan that first seemed like a godsend might start feeling like a burden instead.
This is a reality many entrepreneurs in Singapore experience. Some end up getting a debt consolidation loan or debt refinancing to avoid being part of the 30 percent of startups that fail within three years.
Other loans and lending services are available to businesses, but this article will focus on loans to save your business – debt consolidation and refinancing, and how they can help small businesses that are struggling financially get back on their feet.
Debt Consolidation Loan for Business
Debt consolidation is ideal for a business that owes money to multiple creditors. As the name suggests, it consolidates all loans into a single loan. The best part about consolidated loans is they can have lower interest rates and longer terms (extending the period to pay back a loan is beneficial to businesses because that means they can pay back their debt at a more affordable rate each month).
Consolidated business loans also offer the following advantages:
- They make paying back multiple debts easy and convenient. Instead of trying to recall when the due date for every single loan is, you only have to think about one each month.
- You could end up paying less than expected. The problem with having multiple creditors is that some of them could have high interest and offset the savings you got from low-interest loans. By consolidating them into one loan, you maximise the savings potential of low-interest rates. You might even have the option to settle your loan early without paying an early payment fee.
- You can improve your credit score. Debt consolidation is practically setting a client up for success. The low-interest rate and monthly payment are determined based on your salary, so the loan is tailor-made so you can pay your monthly dues on time. In Singapore, timely payment of loans and bills is the key to reaching an AA rating. Demotion to BB and CC means a borrower is prone to delinquency or late payments, and anything lower (1,813 points or less) often means the borrower has defaulted on a loan.
When Should You Consolidate Your Loans?
For debt consolidation to be effective, you need to do it when the timing is right.
The best time would be when your credit rating is still pretty high. Consolidating debts when your credit rating is already at DD or lower might defeat the purpose: you’re unlikely to get a low-interest loan when you’re already considered a high-risk borrower. If you still consolidate at more or less the same interest, you’d only be doing it for convenience and the loan won’t give you financial relief.
Business Debt Refinancing
Loan refinancing is similar to debt consolidation, except that it addresses just one loan. It is a sound solution if you’re experiencing what we’ve briefly touched on at the beginning of this article: when your existing loan is becoming a burden and you have a hard time paying back your loan at its current payment terms.
Refinancing a business loan means getting a new loan to pay the tenor or remaining debt on your original loan. Just like with consolidated loans, a refinanced loan offers better terms: lower interest, more affordable monthly payments and extended terms.
A successful refinancing can give you and your business the following benefits:
- You can allocate more of the business’s cash flow to operational expenses instead of debt repayment.
- You can save more in the long run.
When Is the Best Time to Refinance a Business Loan?
Refinanced loans can help businesses keep their heads above water, but they can also affect your credit score. This is because when you apply for refinancing, creditors will review your credit history with a fine comb. The new loan will also register as a big balance, which in turn increases your credit utilisation ratio and lowers your credit score.
The negative impact on credit scores due to refinancing is temporary. When you pay your monthly dues on time and your debt is slowly paid off, the calculations will peter out and your credit score can recover.
Having said that, it would be unwise to apply for refinancing if you plan to apply for another loan soon after. You’ll want to apply for that loan with a higher credit rating, otherwise, you’ll get a high-interest loan.
Give your situation a lot of careful thought before deciding on a solution for your business’s financial problems.