I’ll walk you through the process of getting a loan to pay off credit card debts, from considering your current credit card debt obligations and comparing lenders to applying for financing, signing the lender’s agreement, and obtaining the funds. By using a business loan to pay off credit card debt, you can optimize your cash flow and set yourself up for better financing opportunities in the future. However, it’s important to ensure that it’s properly facilitated and that it benefits your business finances.
Step 1: Consider Your Current Credit Card Debt Obligations
Before determining your consolidation options, it’s important to evaluate the current state of your credit card debt obligations. This can help you set clear goals and come up with a debt repayment plan.
Review your account statements and financing agreement to determine the following:
- Current balances
- Applicable interest rates
- Repayment terms
You will also want to check your financing agreement and look out for any penalties or fees associated with the payoff of your credit card so that you can plan accordingly. Once you know the various details of each, you can begin considering your potential consolidation options.
Step 2: Determine Your Qualifications as a Borrower
Lenders will have varying small business loan requirements you’ll need to meet to be considered eligible. Before applying, you should determine your current financial status, inclusive of common factors such as:
- Business and personal credit scores
- Annual revenue
- Time in business
Additionally, review your budget and ensure you can afford the monthly payment required of a term loan. The repayment schedule will likely be longer than the term of a credit card, which operates as a revolving credit facility.
Step 3: Compare Lenders, Loan Types, Rates & Terms
When searching for a lender, you’ll want to:
Step 4: Submit an Application
Once you’ve found an applicable lender, submit an application and await an approval decision. You’ll generally need to provide your contact information, financing request details, and various forms of documentation, which typically includes
- Tax returns
- Financial statements
- Legal documents regarding ownership and business structure
- Additional documents as requested by the lender
It’s likely you’ll also have to provide copies of your credit card account statements for the lender to verify the current outstanding balance and review your financing request accordingly.
Step 5: Review Financing Offers
If approved, you should closely review the terms offered within the proposed financing agreement before signing. Not only do you need to ensure the accuracy of the document, but you will also want to take the time to check that this is the best financing option for you and negotiate any terms as needed.
You should make note of any stipulations that may differ from your current credit card agreements and see to it that you’re prepared to manage the new loan responsibly. Once you’ve determined that all terms outlined within the agreement are suitable to you, you can move on to the signing process.
Step 6: Sign an Agreement and Obtain Loan Funds
After you and the lender have come to an agreement, both parties will sign the proper documentation and begin the process of facilitating the loan and issuing funding. When it comes to paying off the outstanding balance of your business credit cards, funds may be issued directly to the credit card issuer from the lender or facilitated by the borrower with proper documentation and receipt of payment.
From here, it’s important to properly manage any remaining debt and not enter into any new credit card agreements. In fact, to either close out the account or refrain from entering into a new agreement may be a stipulation required of the lender. Not following such a stipulation can damage your credit and will be in violation of the new loan agreement.
When to Consider a Business Loan to Pay Off Credit Card Debt
If you find that your business credit card debts are too difficult to properly manage, it may be worthwhile to consider consolidating them. This can be done in several ways, but a business loan may be an option to facilitate the payoff all at once. This may be applicable to businesses:
- Needing to pay down a large balance: If your current business credit card balances have snowballed and you’re having difficulty paying down the total balance, converting to a business loan can help you pay off the outstanding balances and instead make principal and interest payments.
- Wanting a lower interest rate and monthly payment: Credit cards are often associated with high interest rates. Business loans typically offer more favorable rates, which can lower your monthly payment and save you money overall when consolidating credit card debt under a single loan.
- Switching from a variable to fixed rate: Most credit cards have a variable interest rate, which can be costly and unpredictable. By consolidating credit card debt with a business loan, you can often switch to a fixed rate and prevent increased payments if the market fluctuates.
Essentially, business loan proceeds can be used to pay off the outstanding balance of a business credit card and be restructured with a new rate and repayment plan to simplify the management of the finances of a business.
Where to Get a Business Credit Card Consolidation Loan
Generally, you can seek a business credit card consolidation loan from a traditional lending institution such as a bank or credit union, an online lender, or even friends and family if you’re ineligible for a traditional business loan.
Traditional Lending Institutions
A traditional business loan from a bank or credit union can provide you with either long- or short-term financing to assist you with paying off credit card debt. Essentially, this includes a term loan with a fixed interest rate that will be paid in installments of principal and interest.
Online Lenders
Online lenders can issue financing outside of a traditional lending institution like a bank or credit union. These providers can often issue funds directly or act as brokers with partnering lenders. They commonly have similar financial offerings as a bank, inclusive of various types of business loans; however, they can be facilitated without the need to visit a branch or work with a lender in person.
Friends & Family
If you don’t qualify for a traditional business loan due to a bad credit score or limited resources, you may be able to approach friends and family for financing. While there are still tax rules and regulations to keep in mind, this can be a less formal way to obtain financing to pay off your business credit card debts.
You’ll need to apply an applicable federal rate and set repayment terms. However, this option can allow you to get financing you otherwise may not be able to access.
Pros & Cons of Using a Business Loan to Pay Off Credit Card Debt
| Pros | Cons |
|---|---|
| There may be a lower interest rate when consolidating into one loan (rather than having a variable rate). | Qualifying for a business loan may be more difficult if you have less-than-ideal credit or financial history. |
| One loan is easier to manage than making multiple payments for various credit card debt obligations, as you can condense payments. | You may have to close your credit card accounts once the balance is repaid. |
| It may improve your business credit score over time with consistent payments. | You may have to secure the loan with collateral, which isn’t a common requirement of credit cards. |
Frequently Asked Questions (FAQs)
Yes. Specific to business credit card debt, business loans can be used to pay off existing credit card debt and allow you to restructure the remaining balance with a single loan. This can be especially helpful if you are looking to pay off more than one card.
It can be if you’re looking to simplify the management of your finances. It can also have various benefits such as lower interest rates, lower monthly payments, and a designated monthly repayment amount and schedule.
Generally, no. Most business consolidation loans are strictly used for business debts. Commingling personal and business finances can be troublesome both legally and financially, so it’s best to avoid this scenario and risk further complications.
Bottom Line
If your business utilizes credit cards for its expenses, you’re likely paying back the balance with a high interest rate. If you find that you can’t meet the minimum monthly payments and that your balance has accumulated over time, it may be worthwhile to consider using a business loan to consolidate your payments and potentially reduce your interest rate. This can simplify the management of your business finances and free up cash flow.
