Bombarded with reminders about due instalments arriving every other day, entrepreneurs often struggle to keep track of payments, especially while managing a fast-growing business. Businesses usually tend to rely on multiple loans to hit the ground running, and therefore, at times, it becomes challenging and exasperating to keep up with payments. There is always a probability of missing payments if you employ that money for a golden opportunity to grow. If you did not, you would have to let go of it. It becomes a situation of getting stuck between a hard rock and the deep blue sea.
Fortunately, there is a solution. A debt consolidation would be the first choice to end nagging reminders once and for all and manage payments effortlessly. You should not have to wait until the moment of struggle to apply for consolidation. As a matter of fact, your chances of being accepted are high if you have avoided falling behind on debts by the time you put in the request for consolidation.
What is business debt consolidation?
A debt consolidation enables you to combine all your existing outstanding debts you took out from different lenders into one business loan from one lender. You still owe the same amount of money, but it would be paid down as per a new revised plan to a different lender. Depending on factors like interest rates, your outstanding debt size and overall financial capacity, it will decide whether this will cost you less or more, but it certainly offers peace of mind.
In other words, consolidation is known as taking out a new loan to repay all existing outstanding debts. Now you have only one business loan to settle, to be paid at different interest rates and different repayment terms.
Is consolidation the same as refinancing?
Business debt consolidation and business debt refinancing are entirely different. Unlike consolidation, debt refinancing does not include clubbing of multiple unpaid debts. It is rather about moving a loan from one lender to another to avail yourself of better interest rates and better repayment terms.
While refinancing can help you avail yourself of better interest rates, it is worth noting that this incurs some fees. You will have to pay early repayment fees to your lender to close the existing deal. There is no point in refinancing a loan if early repayment charges cost you more than what you save in it.
Do not forget the fact that refinancing could cost you a lot more money if you choose an extended repayment period. The longer the repayment period, the lower the instalment size will be. It means you will end up paying more money as interest in total, as it will keep accruing on the unpaid balance.
Advantages of consolidating business debt
Here are some of the advantages of debt consolidation loans online:
Simplify your repayments
One of the significant advantages of a consolidation loan is that it helps simplify repayments. As outstanding debts are combined into one large business loan, you now have to pay it down at better interest rates. Since every month a fixed sum of money is to be paid, you can easily manage your budget around it without struggling to meet other business expenses.
It helps improve cash flow
Another advantage of using business consolidation loans is that they help improve cash flow. Now you have to make one single payment every month. It could be much cheaper than the total you had been paying so far. When you do not have to pay too much interest on payments, you can easily increase your earmarked cash. This would help you manage unexpected business expenses.
Since consolidation loans will cost you lower interest rates, the money you retain could be utilised somewhere else. This reduces your burden of rushing to lenders to borrow money.
It helps lower the risk of missed payments
If you have multiple debts to pay off, you will undoubtedly fall behind on payments. It could be challenging to ensure that your business has enough money to pay them off on time. The due dates could fall through the cracks. Once you fall behind on payments, you will end up rolling them over. This will lead to increased debt costs due to late payment fees and interest penalties. It will become even more challenging to repay the debt.
With the help of consolidation, you will not have to struggle to make payments. This is because you will no longer be tied to multiple debts. They will all be replaced by a large business loan. Now you will only have to handle one single debt instead of many. As payments will be made in fixed instalments, you can easily manage them.
Drawbacks of business debt consolidation
Here are some drawbacks of business debt consolidation:
- You will end up paying a lot more money in interest. This is because the repayment length will be revised. Fresh interest rates will be levied. They may not be too cheap.
- You may have to pay early repayment fees, which could offset the interest savings from consolidation. In some cases, it could even exceed them. You should consolidate your business debt only when you are saving some money on interest.
- Loan terms will be revised so that you might be tied to the debt for a longer period.
Is debt consolidation the right choice?
Debt consolidation might not be the right choice for everyone. While it can make multiple payments easier, it cannot make them more affordable. There is no guarantee that you will be able to obtain lower interest rates even if your past payment record is stellar.
Additionally, no lender is obligated to combine all your outstanding business debts, even if you tend to convert them into a single large secured loan. Chances are, two or three loans are merged, but the rest of the outstanding debts are settled separately.
This could increase the burden of debt payments. This time, you might find yourself in an even more difficult situation. It is suggested that you try to consider all pros and cons and then decide whether you should consolidate business debt or not.