Understanding the Advantages and Disadvantages of Small Business Debt Consolidation

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Every business, ranging from small start-ups to largest corporations sometimes finds it difficult to manage debts by effectively handling the loan payments. There is nothing wrong in seeking for financial aid to expand your business or to find working capital, but failing to repay those cash advance on time may ultimately result in losing everything over time. If you find your business struggling with limited profit and high expenses, then debt consolidation may be an ideal option.

The concept of debt consolidation

Used by individuals to bigger businesses, debt consolidation is of various types. So, to do this well, it is essential to know the risks and rewards of consolidating credit card debts. Basically, debt consolidation is the process of combining different loans and other lines of credit into a single principal amount. The ideal option for a lender while trying for debt consolidation is to look for a consolidation loan with a lower interest rate and an extended repayment period.

More structurally explaining, a debtor with multiple debts takes a new loan to repay all existing loans and then start to make a single payment to a single creditor. When it comes to small business debt management, consolidation offers both benefits and drawbacks for aspiring entrepreneurs.

In fact, many debtors are trapped with multiple debts are still not aware of the concept of debt consolidation as a possible way out. Many others are confused about the concept with no idea whether to go ahead or not. There are specialized consolidation lenders who are putting forth many attractive offers, but for a debtor, it is essential to know the pros and cons of a consolidation process to an appropriate decision in the best interest of their business prosper.

Further, in this article, we will discuss the advantages and disadvantages of consolidation of business debts.

Benefits of business debt consolidation

For small business owners, debt consolidation offers many significant benefits to lighten their financial burden. Let’s have an overview.

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  • A single creditor

One of the main benefits of debt consolidation for the small business owners is the comfort it offers. Unlike dealing with multiple creditors, it becomes much easier for you to deal with only one creditor. With a good debt consolidation plan, outside company also helps the businessmen to create a better payment plan and set reminders to stick to it without fail.

For a small business with different line of credit, it’s a difficult affair to keep track of many bills each month and ensure timely payment. The consolidation loans not only cut down this clerical work involved and harassing follow-up calls from lenders but also ensures that you don’t miss any payment to suffer late fees and add-on interests.

  • Lower interest

No one likes to pay more than baseline interest for a loan. One major benefits of consolidation in this regard is that you can potentially downsize your interest through this process. When all the loans as well as credit lines combine into one new loan, repaying becomes easier over a longer term with lesser interest than existing. However, you need to understand the terms clearly as sometimes the lower interest may be an outcome of the extended time period for repayment. Consider these two matrices to find out the best combination.

Drawbacks of consolidation

Considering the above facts, debt consolidation may be an ideal solution for many small business owners. However, as per experts, one should also realize that consolidation is not fully foolproof. Further, we will discuss some downsides of loan consolidation.

  • Extended Payments

While you lower the interest rates, also monthly payments are considered to be a positive thing, debt consolidation can result in terms of loan being extended. Debt consolidation firms often claim to be negotiating good interest rates, some are just drawing out payment period. While your monthly payment can be lower, you may pay more interest to lender.

  • Consolidation is not a cure

It’s not done if you have consolidated your existing loans, but the financial status still remains the same pre-consolidation stage. Consolidation is just a temporary solution and breathing space for the permanent problem. It is a fact that debt consolidation can cut down the monthly payment and even offer benefits of lesser interest rates, but it will not eradicate the root problem if your business expenditure is more than income.

In many cases, small businesses must revisit the strategies to boost the inflow of funds. In some other cases, modifying the financial habits and bringing in stringent cost-cutting measures become necessary. If not handled properly, even consolidation will not save you from going bankrupt over time.

Choosing ideal consolidation options

Considering the above pros and cons, if you decide to go ahead with debt consolidation as the right financial solution for your small business, it is important to do some groundwork before committing. Along with considering the evaluating the loan terms and the interest rates, you need to check whether it is secured or unsecured, duration of payment, other terms, and conditions associated with the new loan by going through the fine prints on white papers, etc.

If, in any case, a consolidated loan ends up unpaid, then secured loans may cost you the business and even your personal property at the end. As many consolidation companies are putting forth several different packages, business owners should carefully evaluate their reputation, acceptance, customer support, and other aspects before shortlisting one. There are many fraud players also in this sector, who engage in less than honest practices also when it comes to financial dealings.

Once on choosing an appropriate lending company as well as the best ways to consolidate debts, one can evaluate various options available to suit to your purpose. As we have seen above, debt consolidation is not a one-size-fits-all type of solution, and the best loans best loans which capitalize on the lowest interest will be trendy in the marketing, but sometimes may not extend the existing loans terms significantly. It is essential to do your homework well in order to make the best possible choice to suit your customized business needs.

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