How to Manage Debt

Pros and Cons of Small Business Debt Consolidation

    Large corporations and small businesses alike struggle with loan repayments. And while there’s nothing wrong with seeking financing to grow your business, failing to repay those debts could result in you losing the company you worked so hard to build. If you’re struggling with low profits and high costs, debt consolidation could be a viable alternative to defaulting on your loans.

    Used by individuals and businesses alike, debt consolidation combines various loans and credit lines into single principal and payment amounts, ideally with a lower interest rate. Structurally speaking, the debtor takes out a new loan to repay the money taken from previous loans. Debt consolidation offers both advantages and disadvantages for small business owners.

    Consolidation Benefits

    Here are some of the top reasons to consider debt consolidation.

    Single Creditor

    One of the primary benefits of debt consolidation is that you only need to deal with one creditor instead of many. With debt consolidation, an outside company creates a payment plan based on your debts and disperses funds to the various lenders as needed.

    For small businesses with several lines of credit, it can be stressful to receive multiple bills each month. Not only does consolidating loans cut down on those harassing phone calls, but it also ensures you don’t miss a payment and fall deeper into debt.

    Lower Interest Rate

    No one wants to pay more than necessary in interest on a loan. One of the benefits of debt consolidation is that you can potentially lower your interest rate for all loans and credit lines. If you choose to consolidate your debts, you will effectively take out a new loan for the purpose of repaying the old ones.

    In many cases, the interest rate on the new loan is significantly lower than what you were paying previously. If you have been unable to pay your debts at the current rates, consolidation might stop you from having to default on loans each month.

    Consolidation Drawbacks

    While debt consolidation can seem like an ideal solution for loan repayment, business owners should realize that the practice is not without its drawbacks. Here are some of the downsides associated with consolidating loans.

    Extended Payments

    While lowering interest rates and monthly payments is generally considered to be a positive thing, debt consolidation can also result in the terms of the loan being extended. Although debt consolidation companies often claim to be negotiating better interest rates, some are actually just drawing out the payment period. So while your monthly payment might be lower, you may actually be paying more interest to the lender in the long run.

    It’s a Treatment, Not a Cure

    One of the main drawbacks of debt consolidation is that it’s widely regarded as a temporary solution to a permanent problem. While debt consolidation can lower your monthly payments and even your interest rates, it doesn’t change the fundamental problem that your business is spending more money than it’s taking in.

    In some cases, small businesses might need to alter their strategies to boost cash flow. In other cases, changing your financial habits might be necessary to avoid going into further debt.

    Choosing the Best Debt Consolidation Option

    If you decide debt consolidation is right for your small business, it’s important to do your research before committing to a consolidation strategy. Along with evaluating interest rates and loan terms, business owners might want to steer clear of options involving secured loans, which require you to pledge your own savings or property as collateral.

    If the consolidated loan goes unpaid, secured loans can end up costing you your business and even your house. Additionally, owners should evaluate different consolidation companies, as some engage in practices that are less than honest.

    Once you’ve chosen a debt consolidation company and loan type, you can evaluate the different options at your disposal. While debt consolidation isn’t a one-size-fits-all solution, the best loans tend to capitalize on low-interest trends in the market without extending the existing loan terms too significantly. Do your homework and make the best choice for your specific business’ needs.

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    Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.