The Pros and Cons of Business Debt Consolidation

How does business consolidation works?

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The Pros and Cons of Business Debt Consolidation

As anyone with business experience can attest, "rolling with the punches" is a vital skill when it comes to running a company. The fact is, cash flow isn't always constant: sometimes business is better than expected, and sometimes it's worse. In certain situations, the only way to successfully weather an economic storm is to take out a business loan.

Over the years, some business owners have had to take out multiple loans to stay afloat. If that describes your situation, don't be discouraged. There are practical steps you can take to cut down on your monthly payments, and move towards complete elimination of your business debt.

One solution to this dilemma is to consolidate all of your business debts into one loan. The following information will discuss how business debt consolidation works, what advantages and drawbacks are associated with it, and how a reputable and innovative lender can help you to get back on your feet more quickly.

What is Business Debt Consolidation?

In the world of finance, the term "consolidation" refers to the act of taking out a new loan to pay off other loans, debts, and liabilities. Basically, it's a way to combine multiple debts into one large piece of debt that comes with more borrower-friendly payment terms. For example, if you have 4 debts that each equal $250,000 with an interest rate of 20%, you would no doubt jump at the opportunity to take out a single loan for $1 million that only has a 3.75% interest rate -- and pay off all of those other debts at once.

Both individuals and business entities can take advantage of debt consolidation. In most cases, business debt consolidation works like personal debt consolidation. Of course, when exploring your options you'll want to ensure that the payment terms associated with the new loan will work in your favor. You'll also want to double check that the amount of your consolidation loan is sufficient to completely cover all of your other debts; otherwise, you'll miss one of the primary goals of this financial strategy.

Consolidation vs. Refinancing

Sometimes individuals confuse the concept of consolidation with the similar but distinct term "refinancing." What's the difference?

• Refinancing is term used when an individual or business exchanges one loan for another; for instance, a $100,000 loan with 10% interest with a $100,000 loan that has a 7.5% interest rate. While refinancing almost always comes with a more favorable payment plan, you don't need to have several debts in order to refinance. 

• Consolidation, on the other hand, refers to the scenario in which a person or business does have multiple debts. Thus, when you take out a consolidation loan your primary objective is to use your newly acquired funding to pay off all existing debts. Subsequently, you'll only have to deal with the repayment terms of one loan, instead of many. 

While the two concepts are distinct from each other, they are both designed to accomplish the same objective: to simplify and reduce your monthly payments.

The Pros of Business Debt Consolidation Loans

There are several advantages that come with taking out a business debt consolidation loan. These include the following:

• Simplified payments. If you've taken out multiple loans, then you are likely juggling multiple due dates and interest rates on a monthly basis. That can be confusing and time-consuming, and actually increase the risk that you'll accidentally miss a payment. A debt consolidation loan allows you to eliminate the complications arising from multiple debts, and greatly simplifies your payment plan. 

• Enhanced cash flow. In many cases, one of the most immediate benefits of a debt consolidation loan is a larger amount of cash available for operating expenses each month. With a lower interest rate, you'll be able to more effectively allocate your cash on hand to sustain and grow your business. 

• A better credit score. Another key advantage of a business debt consolidation loan is the potential for a significant boost to your credit score. After all, you've used the borrowed money to pay off all of your other debts, and prospective lenders will take notice of that. 

The Cons of Business Debt Consolidation Loans

While there are many benefits associated with business debt consolidation, no debt elimination strategy comes with its challenges. Here are a few factors to keep in mind when considering your debt consolidation options:

• A lower interest rate is not always assured. Lenders look at several factors when determining a loan's amount and interest rate, such as the prospective borrower's history, credit score, current financial circumstances, and so forth. While you should definitely seek out a consolidation loan that comes with a lower interest rate, sometimes this can be difficult to secure. 

• Losing money in the long run. When you take out a consolidation loan, your repayment terms reset. That means that even with a lower interest rate, you may end up paying out more money in the long run. For instance, if you have two debts that you're only a year away from paying off, then a consolidation loan with a 5-year repayment plan may not make a lot of sense for your business. 

• Debt consolidation does not guarantee better cash flow. The fact is, if your business has severe cash flow issues, then a debt consolidation loan will only function as a short-term "patch." It certainly won't provide you with a permanent solution to your problem.

In summary, a business debt consolidation loan can be an excellent option for reducing and simplifying your monthly payments, lowering your interest rate, and enhancing your company's cash flow. Of course, if you decide to pursue a debt consolidation loan you should partner with a reputable and experienced lender.