Consolidating business debt to increase cash flow

As a business owner, you probably took out a loan to kickstart or grow your business. Then, along the way, you’ve faced financial obligations, unexpected changes and unforeseen circumstances like structural changes, investment challenges and economic downturns.

There is hope. Debt consolidation can help you dig your business out of a financial bind by managing the debt you owe and mitigating high interest rates from credit cards and other debt sources.

Review debt on an ongoing basis and consider the prospect of refinancing or consolidating business debt, says Jacob Richards, Senior Vice President of Commercial Lending at California Bank & Trust. These instances can be resolved by consolidating debt:

Your cash flow is low: Cash flow is the most important barometer of business success. “Don’t just pay attention to revenue, pay attention to your cash flow,” Richards said. “Business owners need to focus on making money first to be profitable.”

Your revolving credit balances have piled up: While credit cards are convenient for everyday purchases and a line of credit ensures there’s cash on hand, both options are geared to the short term. If your business has taken on more revolving credit obligations, Richards advises owners to proceed cautiously. If the business can’t maintain a zero card balance each month, consider consolidating credit card and other debt sources with higher interest rates.

Your balance sheet is off: Heavy debt can be hazardous. Overleveraging your balance sheet beyond a 3 to 1 debt to tangible net worth ratio should alert you to contact your banker and start working toward consolidation.

You want to reduce headaches: Fewer distractions can help you manage your business better. Consolidating business debt by streamlining long-term and shorter-term obligations efficiently increases cash flow. As a result, you can stay focused on day-to-day business tasks. 

Speak to your banker about options and ask for guidance on choosing the right one. A business debt consolidation loan identifies your outstanding debts, and then rolls them into a single loan, often at a lower rate.

• Term loans – Get a fixed repayment schedule and a set amount for greater security and predictability, often at a favorable term. Refinancing to a conventional term loan can help you pay off the original debt with lower payments and interest expenses.
• SBA loans can provide funding for small-to-medium-sized businesses, although they may impose strict qualification criteria, require up to two years of business operations and take up to several months to complete.
• The California Small Business Loan Guarantee Program* (SBLGP) – Lenders offer personalized and creative financing for cost efficiencies on loans up to $2.5 million.

When considering a loan, Richards recommended a variety of factors, in this order of importance:

1.  Interest rate
2.  Amortization schedule
3.  Loan term
4.  Payment schedule and loan fees
5.  Prepayment fees and/or penalties.

“Short-term rates are often higher than long-term rates and consolidating to a long-term rate will provide you with stability,” Richards said. 

Ultimately, work with a banker who has financial experience and not just the ability to win over new clients. Find one who has credit expertise and can review business bank statements. Also review the banker’s experience and determine whether he or she focuses on manufacturing -- which requires a cash flow orientation toward long-term capital needs – or service-oriented forms that require a focus on financing receivables.

“A good banker will help you make better choices and keep you from bad decisions like using revolving credit to finance long-term assets,” Richards said. “For example, instead of using a credit line to purchase equipment you’ll use for five to 10 years, you should opt for a term loan instead.”  

Stay optimistic and be ready with everything your bank needs to evaluate your fitness for consolidation. The first thing a bank reviews is your cash flow, says Richards. From there, they’ll review the collateral you have available, along with your character and expertise.

“Also, be sure you’re not distributing too much cash to shareholders or investors,” Richards stressed. “Retaining earnings for use by the business helps prevent a weak balance sheet.”

Consolidating business debt into a single loan can make repayment more manageable and affordable. Work in tandem with your bank to see if it’s the right time to consolidate payments and increase your cash flow with conventional term financing.

Get started by contacting a banker directly to talk through your financial tools options to keep your business strong and growing. 

*Subject to credit approval. Terms and conditions apply.[cite::171::cite][cite::172::cite]