If you’re like many small business owners, you have probably opened one or more business lines of credit over the years. Whether you wished to fund a new storefront, buy some new equipment, expand your online presence or develop a new product line, the extra money probably came in handy at first. Your business may even be in better shape today than it would have been without that access to quick cash.
But if you’re no longer in need of the liquidity that a credit line provides and still find yourself with thousands of dollars in related interest and principal payments piling up with no end in sight, you need to begin paying off your debts in a meaningful way.
If you’re just barely making your credit line’s minimum payments and feel like there’s no end in sight, you may require the services of a debt relief professional actually to reduce the principal amount that you owe. Our free debt analysis takes only a few minutes, and you won’t have to pay a dime for debt consolidation services until you see real results.
Many business owners mistakenly assume that paying off a business line of credit is as easy as paying off a business loan. Unfortunately, business loans provide borrowers with added security in two important ways.
One, they almost always have a fixed term, principal, and interest rate, eliminating any surprises when the monthly statement comes through. Your minimum payment will not change as long as you make it on time and don’t accrue penalty interest. Two, business loans tend to have a shorter term, which makes them easier to keep track of. The repayment period for a business loan rarely exceeds five years.
Business lines of credit, on the other hand, represent a far more open-ended commitment both on the part of the lender and the borrower. The standard term is 10 years, with a refinancing option that could extend the line indefinitely, and borrowers can draw upon it as many times as they wish as long as they do not exceed a predetermined limit.
These financial products are perfect for businesses in the midst of an expansion, as a credit line makes multiple large-ticket equipment purchases easy. They are also perfect for lenders’ bottom lines, because they tend to be far more profitable. For two reasons, it’s in your interest to begin paying off a business line of credit quickly and to seek help from a debt consolidation professional if you’re struggling just to make your minimum payments.
First, in exchange for the freedom of multiple draws on their account, business lines of credit often charge borrowers a fee each time they make a withdrawal. At $50 or even $100 per withdrawal, these can quickly add up. Two, the interest rate on credit lines is usually variable. It will not change arbitrarily unless you fail to make a minimum payment and incur penalty interest, but it will vary from month to month based on a benchmark interest rate like the LIBOR or prime rates.
Variable interest rates can cut both ways. When interest rates are falling, they can be a good thing. In the current low-rate economic climate, however, interest rates have nowhere to go but up. If the rate on a $10,000 line of credit jumps from 10 percent to 15 percent next month, that’s $500 more you’ll have to pay each year for the same funding.
For the same reason, your minimum monthly payment will vary over time. If you only make your minimum payments each month, you’ll be in debt for years.
To begin paying off a business line of credit, you must first stop drawing on it. You’ll also need to pay as much of it off as you can possibly afford each month, potentially selling non-core business or personal assets to do so. You can buy those things back later with the savings you’ll accrue from paying off the loan quickly. Because most business lines of credit require up to 20 percent of the line’s value in collateral, it’s in your interest to avoid any seizure of property or other assets.
If your debts continue to pile up after taking these steps, contact a credit relief expert for a free debt analysis. Your bank doesn’t want you to default on your obligations any more than you do, and they’re often willing to settle for less than half of the outstanding balance on your credit line.
Rather than take out another expensive loan to pay off your existing debts, look to our debt professionals to negotiate a favorable settlement and get you out of debt faster than you ever thought possible. Call during extended business hours or fill out the free online form to get started on the road to financial freedom today!