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- Unlike debt management and debt settlement, debt consolidation does not attempt at negotiating the installments or outstanding payment value with your creditors.
- Debt consolidation loan companies do not ask you to stop making your monthly payments.
- You can pay off your outstanding debts with the consolidation loan amount and find additional capital to fund new projects.
- Any debt consolidation company will first check the applicant’s credit history. A credit score of 750 and above is excellent, but since most companies approach loan companies because of their dire financial mess, most consolidation loan companies approve loans for applicants with FICO scores of 650 and above.
- You can find online lenders, who offer loans to start-ups with less than perfect credit score. However, check their repayment terms very carefully. Consult an expert to find out the resulting APRs and research the interest rates before committing.
- Depending on your business profile, you can get loans from $10,000 to $50,000 from the multiple lending parties out there. Even banks and credit unions offer small business and startup consolidation loans. Clean payment history will increase your chances of landing a better offer.
- Your company’s financial stability or cash flow over the last few months will also determine the outcome of the application process. Just as in case of individual applicants, the financial history of a new business or even an old one determines the loan amount, interest rate and repayment terms.
- The repayment is another factor that depends on your company’s financial profile. Some business debt consolidation companies lend money to start-ups by accelerating payment plans. Extending the repayment term will depend upon your personal and business finances. In fact, an extension of the term can also result in higher overall APR.
Debts have become a way of life for most people. Different people choose different methods to manage and resolve their debts, depending upon their current financial status. You must have heard about friends opting for debt resolutions and debt settlements, and wondered if both are the same. There is a slight difference between the two, although their ulterior aims are the same – to reduce and resolve all outstanding debts. Off late, some people are using the terms interchangeably, but we cannot say that they mean the same.
Whether you opt for a debt settlement plan or a debt resolution plan, you will enjoy a few benefits, and you will have to face a few disadvantages. For example – debt settlement will help you get lowered interest rates and amicable payments, but the companies will require you to withhold monthly payments for a while till they negotiate better payment terms with your creditors. This can affect your credit score adversely. It can take almost a year to restore your FICO score to its former glory. Now, that is alright till you realize that even the loan prospects of your legally wedded spouse can suffer due to your poor credit scores.
Debt settlement: your way to lower payments
Settling a debt all by yourself is not impossible, especially if you have a little prior experience. DIY debt settlement is becoming very popular among American citizens since debt has become another common part of regular life. A DIY process involves a lot of research, risks and decision making. Therefore, a lot of people prefer sticking to a company or a lawyer for a smoother experience. These companies and lawyers deal with multiple debtors and their creditors. They have the experience necessary to negotiate favorable terms. In fact, a well-known veteran company may even have experience dealing with your debtors. This gives them an upper-hand during the negotiation process.
To begin any debt settlement, the company and lawyer will ask you to stop paying your monthly installments. You will need to make all the payments to a savings account that your company or your lawyer can access. Now, unless you can completely trust these companies or individuals, it is inadvisable to deposit cash into new savings accounts they can empty! Another risk you will always be taking is the direct hit on your credit score once you start missing your payments. These companies only pay your creditors when the amount in the savings account reaches the negotiated amount. It can take between 36 months to 60 months to pay your creditors off completely.
Debt resolution: a healthy debt payment process
A debt resolution attorney will work with you to help you understand your finances. You need to chalk out a payment plan to be able to taste financial freedom. Once you have a blueprint of your savings, total payable and payment plan on the table, your attorney will contact all your creditors one by one for settling new payment terms. This can include the elimination of penalties, reduction of interest rates and new lowered payments for the outstanding debts. This is a lot like debt management and debt settlement, in this respect. However, in case of debt resolution, you need to complete current payments to mitigate the lawsuit risks and credit score risks. Debt resolution hardly has any negative effect on your credit score. Since you never stop paying them while your negotiation processes are already in motion, there is almost zero depreciating impact on your credit records. Additionally, if there are any legal matters associated with the debt and the payment process, your debt resolution attorney will address it.
The difference in cost
One main difference is the method of payment in each case. It is true that a debt settlement company takes its cut before the monthly payment goes to the creditor! The debt settlement companies and lawyers usually charge a fraction of the forgiven debt or a fraction of the payment. The debt resolution lawyers charge similar to other attorneys you have worked with. They work by a retainer and bill the extra hours once you exhaust the retainer. Looking back, debt resolution seems like the cheaper option. Debt settlement involves a lot of money as a fee, that could go into your own savings account or that you could use to pay off outstanding debts. Attorneys often have more experience and legal know-how, therefore the risks of working with them are much lesser, and you get to pay much lesser in total.
When a family is involved, why not try the more amicable options before you opt for debt settlement. All the ways to resolve debt have their niche sets of requirements, pros, and cons. However, you need to weigh each one of them and find the one that serves all your purposes while facilitating future loan opportunities.
Credit cards are a fine way to pay for new equipment. It is a powerful piece of simple plastic that has the power to buy the world. Be it urgent plane tickets for a business conference or a conference hall booking for an investor meeting; these credit cards can make anything happen with just one swipe. When the time comes to take a look at the final payments, it becomes a real-life nightmare. Since business credit cards and even small business loans offer almost endless purchasing power to the startup owners, most credit card users keep swiping without realizing the surmounting debt they will have to pay at the end of the month to keep their credit scores afloat.
The bliss and burden of business credit cards
Business credit cards offer a way to keep the business finances and personal finances separate for everyone. Over 50% of the startup owners and small business entrepreneurs have business credit cards because they are convenient and offer instant salvation for difficult financial situations. The risk becomes prominent when the small business owners and start-ups start spending tons from credit cards without understanding the terms of repayment, rates of interest, the imposition of penalties and the monthly charges. Most importantly, most business owners do not realize that business lines of credit are not a part of the Credit CARD Act, 2009. Therefore, they often face surprise interest hikes and penalties for lapsed payments or deferred payments.
One way to manage business finances is to let a professional take a look at your expenses. Sometimes, start-ups find it easier to save a few thousand dollars each month by simply redistributing their credit card payments. Since most SMEs handle more than one credit card, it becomes difficult to keep a track of the multiple payments that the card companies demand each month. It often requires recurring payments each month, involving several interest rates and varying APRs. Calculating the APR for each small business loan and credit card loan becomes too daunting for a startup with their limited resources. Most start-ups do not have separate finance departments that can handle the several monthly payments due to multiple short-term loans or small business loans.
The better way to manage outstanding lines of credit
The smarter idea is to collate all the outstanding debts into one. You can combine all the debts you currently have irrespective of their payment periods and the number of installments left. You can combine 2 or more debts with different interest rates and APRs into a single big loan. It sounds like trading multiple loans for a fresh loan that is evidently bigger, but that brings down the number of monthly payments to just one. You get to pay just one company (the start-up business debt consolidation loan company) at a flat interest rate and a flat APR each month.
Your basic goal is to lower the monthly payments. Once you decide to apply for a debt consolidation loan, do not forget to find out if you can afford the new payment. Consolidating your existing lines of credit will be futile if you are unable to meet the payment requirements each month. After all, you are just shifting the weight of your debts around to make the load more bearable. It is just shifting the pile of debts from an unmanageable place to another that offers friendlier payment terms.
Factors every debt consolidation company considers before approving loans for start-ups
Not every startup survives in spite of the existence of such alternative financing options and debt management procedures since debt consolidation loan comes with certain qualification criteria irrespective of startup’s target market.
Wrapping things up
Most financial institutions, finance experts, and blogs will have you believe that qualifying for a new loan that can consolidate your payments is easy. However, there are chances that you might not qualify for a loan right now. There is no need to become crestfallen and lose all hope since you can always ask the lender for the reasons you did not qualify. If the reason is as simple as a poor credit score, you can always ask a non-profit credit counseling company to help you build an impressive business profile with healthy credit scores for future loan applications.