Debt Consolidation for Businesses

Businesses that struggle to operate with high debt levels may benefit from debt consolidation.

A Chinese proverb says, "To open a shop is easy, to keep it open is art." Business owners are pelted on a daily basis with situations that can derail them from the path to success; the art lies in navigating these circumstances with grace and effectiveness-such as addressing a debt problem before it eats the business alive.

High debt levels can suffocate your business just as they can suffocate your personal life. If you're a business owner who's struggling to keep the doors open under the weight of debt, don't assume that closing up shop is the only answer. Depending on what factors are causing the debt problem, a debt consolidation loan may be a strategy to consider.

Too much debt or not enough business

The first question to ask yourself is why the business is in debt. If the company is young, it's likely that higher-than-expected start-up costs are to blame. Perhaps sales didn't ramp up as you'd planned, or your estimates for initial equipment buys were insufficient. If the business is established, however, it may be more difficult to determine where the problem arose. Have your expenses been increasing more quickly than your sales? Or did you have a large, one-time expense (such as a lawsuit settlement) that forced you to borrow?

Ultimately, you want to determine if an infusion of less expensive debt will allow the business to continue running profitably. If the answer is yes, you'll have to prove your case to a lender, who'll look at the business cash flow based on recurring revenues, expenses, working capital needs, and debt payments. If regular, recurring revenues aren't sufficient to cover ongoing cash flow needs even after a consolidation, you'll have a hard time qualifying for the loan. On the other hand, if you can show that the debt resulted from non-recurring items or factors that have since been remedied, you'll have far more success.

Streamlining debts

Revolving lines of credit, business credit cards, and supplier accounts can charge high rates, particularly if your business is less established. If you have these types of debt, a debt consolidation loan would likely entail replacing these revolving accounts with a less expensive, long-term debt facility. Typically, this debt would require the business to make periodic principal and interest payments; the latter can be variable or fixed. Larger businesses may be able to negotiate a custom repayment structure that matches the needs and/or seasonality of business operations.

A successful debt consolidation will reduce the company's overall cost of borrowing, and minimize the cash flow burden of the required debt payments. Thereafter, the business should be producing enough in sales to cover the cost of its operations. That would leave you the freedom to practice the art form you know best-leading your team to success.