Every entrepreneur knows that a business is all about risks and rewards. While all the homework may have been done, a great business model evolved, and even the financing arranged through credit cards, unexpected changes in the business environment could affect your cash flow and profitability. From a very comfortable situation, you could suddenly find yourself struggling to make your scheduled debt repayments and soon you seem to be mired in debt. If this scenario sounds familiar, you would be right because the inability to manage debt is possibly the single-largest reason for small business failures. It is very important for you to be aware of how to manage debt liabilities, including debt consolidation, in case your business takes a sudden downturn.
Debt Consolidation Explained
Conceptually the process of debt consolidation involves aggregating multiple credit card debts, business loans, or lines of credit into a single loan, usually carrying the lowest rate of interest that can be obtained. The new loan is then used to extinguish the existing loans that typically had been carrying a higher rate of interest. The business owner now has to service only one loan – the new one as per the schedule and monthly installment agreed upon with the lender.
Is Business Debt Consolidation Recommended?
If you are an entrepreneur who has maxed out his credit cards, taken personal and small business loans and are unable to make the monthly payments you could benefit in a number of ways by consolidating your multiple loans. Typically, by taking a consolidated loan, you will be able to retire all your outstanding that may have carried a higher rate of interest. The lower rate of interest applicable on the new loan will make the monthly installment payment more affordable. Also, you can negotiate with the new lender regarding the tenor of the loan; you can ask for a longer tenor to bring down the monthly due. However, it is best to settle for a tenor that allows you to pay the loan off in the shortest possible time because you then pay less interest in total dollar terms.
Another great advantage of debt consolidation is that now you do not need to monitor multiple accounts and ensure that you make the monthly payments on the due dates. By paying off your credit card dues and making regular monthly repayments of the consolidated loan, you can actually begin to repair the damage done to your credit score. You can take the help of agencies that specialize in arranging easy debt consolidation for bad credits if you have already managed to ruin your credit score.
Debt Consolidation Caveats
As a solution to business financing problems, you need to take a hard look as to whether you will be able to solve your financial mess by going in for business debt consolidation. It is vital that you evaluate whether you are going to benefit and that you are actually getting a good deal. Among the various things that you should consider are the rate of interest, the amount to be repaid every month and fees that are being charged for taking this new loan. The term of the loan is also important because by adjusting it you can keep the monthly due to something that you can afford without stressing yourself, however, the longer the tenor, more is the total interest paid by you.
The main objective of a business debt consolidation exercise is to make your debt management more effective by lowering the monthly outgo and reducing the number of creditors that need to be dealt with. The reduction of the monthly payment results in the cash flow improving and enables you to allocate the extra money to working capital and marketing. Even though you may be able to get a lower interest rate if you secure the loan with your assets, you need to be really careful if you are considering mortgaging your home or your business assets because if the business ultimately does not recover, it could mean that you end up losing both your business and home.