Business debt consolidation loan may be what you need to improve the financial situation of your company.
According to reports, nonfinancial businesses have an outstanding debt balance of $15 trillion by the 3rd quarter of 2018. While this might seem alarming, it is actually more common than you thought.
Using debt to progress in business is sometimes a necessary step to take. In fact, a lot of startups are financed by borrowed money. Over the course of the business, they will continue to borrow money or use credit to expand or simply manage their cash flows better.
But this does not mean it should be abused. Sometimes, companies take too much debt and open a lot of accounts to fund what they need. If you find yourself struggling to pay off your business debts, it might be a good idea to find a debt relief program that can make the payments easier. One of the effective options that you have is a business debt consolidation loan.
About business debt consolidation loan
When you fail to manage your business finances properly – you are left with limited cash flow and inability to pay off debt. There is a high chance that their business will never recover and completely fail. Statistics reveal that 8 out of 10 business failures are caused by cash flow issues. If you cannot do something about your debts, most of your profits might go to your debt payments. Soon, you will run out of revenues and rely on debt to keep the business afloat.
You should not let this happen to the business if you want it to be successful. This is why you need to give a business debt consolidation loan a chance.
What is a business debt consolidation loan
This is a type of debt relief program where you take a huge loan to pay off the multiple debts that you owe. Any debt that does not have a prepayment penalty should not be included. But if the low-interest on the consolidation loan will help you save more than the prepayment penalty amount, then you might want to include it as well.
When you get approval for the loan, you need to use it to pay off all your other debts. Once the other debts are paid off, you are left with just one payment each month. If you were able to qualify for a low-interest rate, that would help you save a lot of money on the debt.
Signs it is the right solution
While a business debt consolidation loan seems like a great debt solution, you need to know if it is the right option for you. There are certain signs that will tell you if you should pursue this option.
First of all, you need a high credit score – at least, your personal credit reputation should be okay. This will have an effect on the interest rate of the debt consolidation loan. You should also have the right type of debts. Apart from the prepayment penalties, the debts that you should be consolidating must have a higher interest rate than the loan that you will get. This will ensure that you will save money on the loan.
You will also get favorable terms on the loan if you had been in the business for a long time. This will make the lender feel secure about approving your loan. It will show stability and your ability to survive the current financial hurdle that is making you borrow the loan.
While your multiple debts may be causing problems with your cash flow, your business should still be profitable enough to pay off the loan that you will use in debt consolidation. If not, then a business debt consolidation loan may not be enough to solve your current financial problems.
Pros and cons of a business debt consolidation loan
Like all the other debt-relief options, a business debt consolidation loan brings a lot of advantages and disadvantages. Understanding what these are will help you decide if you should pursue this debt relief option.
The first advantage of using a debt consolidation loan to pay your business debts is having a better repayment plan. Usually, businesses can afford to pay off their debts. However, multiple credit accounts require a lot of effort to monitor and pay off. This is why consolidating the debts makes sense. It simplifies the huge debt problem. Instead of having a lot of accounts, you just have one to pay each month. It will be less stressful to manage and the chances of missing a payment are lower.
Not only that, if you have high-interest rate debts, you can lower that and save money in the process. When you save money, that frees some cash for the business to use on something else.
With more money saved and a less stressful debt situation, you can focus on other things that will make your business more successful. You can start taking new risks that will take your business to the next level.
Of course, there is always a list of disadvantages to using a business debt consolidation loan. First of all, you will not be solving the real issue. You need to figure out why you have a lot of debt in the first place. If it turns out that you have a problem with managing your business finances, then your debt problem will not really end. If you have a high overhead expense, that may also be fueling your debt issues. The debt consolidation loan will not solve these. You need to improve how you manage the financial side of your business.
If you get a longer repayment period to have a lower monthly payment, that might also make you pay more towards the interest rate. This is true even if you got approved to get a low-interest loan. If you want to avoid this disadvantage, you can opt to get a loan that has shorter repayment terms. This will not just help you save money on the interest payments. It will also help you pay off the debt a lot faster. Doing so will free your finances to make your business grow.