Savvy small-business owners are always looking for financial solutions to improve their debt situation, lower their expenses and improve their cash flow, and debt consolidation is a move that can potentially help them achieve all three. The following is some information that can help you determine if debt consolidation could be useful for your business.
First, it is important to understand the differences between debt consolidation and debt refinancing. Refinancing allows you to get a lower rate by taking out a new, lower-interest loan to pay off the initial loan with the higher rate, while consolidation lets you combine several loans or merchant cash advances into one loan.
“An increasing number of borrowers have multiple, high-interest small-business loans and merchant cash advances,” states NerdWallet staff writer Jackie Zimmerman. “This is known as loan stacking and can happen when borrowers fail to qualify for one large, low-interest small-business loan.”
With many individual loans to worry about, refinancing isn’t a likely possibility to help the situation, which is why many small business owners consider consolidation. Consolidation can succeed in simplifying an entrepreneur’s finances, but it has its pluses and minuses.
While consolidating business debt doesn’t make the debt go away, it can potentially give your business the advantage of lower monthly payments by combining all debt into one loan with a lower interest rate. This can in turn improve your cash flow, which as all business owners know is the lifeblood of a business and critical to its success.
With improved cash flow, your business will be better able to pull through tough times, helping it stay on track to eventually repay the debt in its entirety. Furthermore, debt consolidation doesn’t save just money on monthly payments—it also saves time.
“If you’re overwhelmed by calls from multiple creditors, consolidation can be beneficial because instead of dealing with several accounts, you only have to worry about one,” says Inc. contributor Jared Hecht, the CEO and co-founder of Fundera, a small-business lending marketplace. “A financial advisor can help you compare the details of the new consolidation loan with your existing loan agreements.”
By comparing all these details, you can ensure that you are getting a good deal with a favorable interest rate and monthly payments. The length of the loan term is also important to consider to determine how much you will pay in interest over the long haul.
Consolidation loans may be offered as unsecured or as secured, the latter of which requires a significant asset to be used as collateral. By using an asset, such as a home, for collateral, the financial institution is often able to offer a lower interest rate. Risking your home or business as collateral, however, is a very serious decision that should not be taken lightly.