It is difficult to imagine a business sans loans. Business owners often rely on multiple loans to hit the ground running. A dynamic and complicated environment makes it hard for entrepreneurs to keep up with payments. Juggling between various interest rates and due dates could feel overwhelming. Here comes a solution: a consolidation loan.
A business consolidation debt enables you to combine all your existing business debts into one single loan. The biggest benefit of consolidation is that you only need to make one monthly payment. Consolidating all your existing debts makes payments affordable, but this will not always be the right choice.
Upsides of business consolidation loans
Here are the advantages of debt consolidation:
It simplifies debt handling
A business consolidation loan makes payments easier and more manageable. Now you do not have to track the due dates of different loans you owe. Since you have merged all of them into one large loan, you know how much and when you have to pay every month.
After combing through your existing business loans, you will be offered revised interest rates. They will most likely cost you less money than otherwise. You can easily budget around payments, which lowers the risk of a default.
You qualify for relatively lower interest rates
Debt consolidation loans will help you qualify for lower interest rates. Credit cards and short-term loans charge high interest rates. Most of the businesses find it difficult to pay off on time. Though consolidation is not meant for debt reduction, it still helps reduce interest rates. However, this happens only when your business credit rating is decent.
It helps improve cash flow
Businesses often struggle due to poor cash flow. If a larger proportion of money goes towards debt payment, you will end up with little cash. It is fuel for your business. No business can survive without cash.
A business consolidation debt will significantly expand your cash flow. Now you do not have to pay high interest rates, and further, the loan is repaid over an extended time period. This helps your business retain some cash on hand. When you have sufficient cash, you can continue business operations.
It helps boost business credibility
It is essential to be consistent with your business payments. Whether you are paying your suppliers or lenders, on-time payments will help improve your business credit score. It will help you qualify for attractive deals in the future.
A decent credit score is also required to qualify for a higher limit for a business credit card or a business line of credit. Strong credibility also helps you acquire products on credit from your suppliers.
Fixed repayment terms
Business consolidation loans enable you to settle dues in fixed repayments. They are more affordable than revolving credit because the latter involves payments at one stroke.
Downsides of consolidation loans for business
Here are some demerits of business consolidation loans:
They cannot always be cost-saving
Undoubtedly, consolidation results in more affordable repayments, but it does not always hint at cost-saving. Some small businesses might choose longer repayment terms. Doing so will result in even more interest payments in total.
It is enjoined that business owners carefully calculate the impact of consolidation on their budget. Though not in the short run, the impact could be deep in the long run. Be careful while combining existing business loans.
They charge higher fees
Lenders will charge fees in order to replace your existing loans with a single loan. There is no set limit for fees, as it depends on how risky a lender perceives you and the size of the consolidation loan. In addition to transfer fees, there will be some additional charges too. Sometimes, fees that you pay on consolidation offset the benefit of saving money on interest. Watch out for this aspect too.
It cannot address underlying financial challenges
It is likely that you will rely on business debt due to the high cost of operations or sluggish sales. A business consolidation loan cannot help you solve these underlying financial issues, as it is only replacing the debt, not reducing it.
Consult an expert or sit with an accountant and a financial advisor to get to the bottom of the cause that pushes your business over the edge of debt.
Things that you should consider before consolidating business loans
Here is what you should consider before consolidating business debts:
Examine your current debt and overall financial condition
Do not jump in. You should carefully assess existing debts. It is likely that the interest you pay on them and their repayment terms are more favourable than those of consolidation loans. Sometimes, debts are racking up because you are not being paid by your debtors. Work out if there is any link between debts and poor sales or lower prices. By identifying causes of disrupted cash flow, you can easily arrive at a conclusion.
Evaluate the impact on cash flow
It is vital to evaluate how your consolidation will affect your business cash flow. Since they are subject to long repayment terms, you might end up paying more than you would otherwise. In the end, your business’s earmarked cash will deplete. Do not forget that cash is at the forefront of all sources to keep your business running.
Understand lenders’ requirements
Before approval of consolidation loans, lenders will peruse your credit score and financial stability. Not all lenders will sign off on your application, as it is likely that you fail to meet their criteria. If your business demonstrates a picture of inconsistent revenues, lenders will impose hefty rates. It means consolidation will not be fruitful for you. Some lenders may also demand collateral to reduce their risk. Research before applying for these loans.
To wrap up
Sometimes, it feels like consolidating your existing business debts, but they might not always be a favourable deal for you. It is worth comparing interest payments and repayment schedules before deciding on the consolidation of business debts.
