Published July 23, 2018
A business can get bankrupt when there are no measures put in place to deal with unforeseen change in cash flow. When your business is not in a position to pay back a debt, a debt consolidation approach may be of help. This risk is something that every entrepreneur needs to take in such a situation. It doesn’t mean that you did anything wrong but that is how just things turn out to be in business. You definitely have researched the market well and come up with a promising business model. That means getting funds to start off. Business credit cards and a small loan for your business often are the ways used to raise capital.
All borrowing is usually done based on the expected business revenue. For some time, the business might be doing well and that means you start paying back the loans as you continue making a profit. All of a sudden, the cash flow in your business gets affected. This may be as a result of costs going up or a dip in sales. This makes the debt repayment plan a big challenge. This is a common occurrence in the business world. However, it is not the end of the world for you. A debt consolidation approach could be all you need to deal with your current situation.
Understanding Debt Consolidation
In simple terms, debt consolidation involves a combination of various lines of credit and borrowings into one account at the lowest interest rate there is in the market. That means getting a new loan with the sole intention of paying off the already existing debts implying that you will only be left with the new loan to pay, which is now being called the consolidated loan.
Why is a consolidated loan right for a business with multiple creditors? There are different ways to look at it. For one, getting calls from various creditors can be overwhelming at times. In that way, consolidation is helpful in that it helps you deal with one creditor, which is less burdensome especially when compared with tackling each of the creditor’s dynamics. Secondly, you can be eligible for a debt consolidation for your business at a much lower rate of interest. This means being able to make manageable monthly payments where a big percentage of the principal amount goes to the principal.
Things to be Aware of about Debt Consolidation
Everything has its downside and so does debt consolidation. Therefore you must take note of them prior to making an application for a business debt consolidation borrowing. Always assess your financial situation and see how you are going to benefit. You may need a financial advisor to help you make a comparison between your existing loans and the new consolidated loan. This is very important to help your business come out of debt.
Important things to look at include any charges attached to the new loan application, monthly payment figures and the interest rates. The loan terms are also something to consider because the length of the loan has a contribution towards the effective annual interest rate. Remember that the objective here is to make your business debt situation manageable: reducing the number of creditors and lowering your monthly repayment amount. If the consolidated loan doesn’t achieve these two objectives, it may not suffice.
How to Proceed with the Loan Consolidation Option
Now that you are persuaded that your business needs to consolidate its debt, you can choose from various for-profit companies to broker your debt consolidation loan. The consolidation company negotiates the new facility on your behalf, gets the collections and pays off your many creditors. This company acts as an intermediary between past creditors and your business.
It is important to note that debt consolidation can either be secured or unsecured. The secured option may give you a lower rate of interest and therefore, it could be more enticing than an unsecured one. However, the reduced rate may not add any value especially if your business is in deep debt. In the event that your business defaulted on a secured consolidation loan, that means you close down completely.
There are unexpected changes that happen in the business circles involving debts that can get out of hand and scary to your success. When that happens, consultation with financial consultants is very important. Different businesses have different financial situations and therefore, it is important to factor in the consequences of each of the options available for your business to take.