Taking out loans to grow business can be a wise financial move for entrepreneurs who need to act when an opportunity presents itself.
When the return on their investment doesn’t match up to the financing they acquired business owners find themselves in a bind.
That’s where small business debt consolidation can come in handy. By consolidating their small business’s debt, business owners can reduce the pressures of owing money to various creditors, reduce their interest rates, and save money while paving a path toward financial stability.
Interested in consolidating your small business debt? Contact National Debt Relief today or keep reading.
How small business debt consolidation works
Debt consolidation can take many forms, but the basic principle is always the same. Through some financial instrument, an individual or a business takes all of their debts and combines them into a single debt. This debt often carries a lower interest rate and lower monthly payments than all of their former, separate debts. This also makes it so that there is only one payment and one creditor, which simplifies the payback process.
Generally, small business debt consolidation comes in the form of a loan from a bank or another creditor. This loan is large and usable to pay off all debts at once, effectively rolling them into the loan.
There are other small business debt relief options, including debt settlement and bankruptcy, but they function much differently.
Debt consolidation vs. debt refinancing
Many people confuse debt consolidation and debt refinancing. They’re both methods for making their debt easier to deal with, however, there are significant differences between the two concepts.
Debt consolidation is all about turning several debts into a single debt. It doesn’t matter how someone does it; if they’ve turned many debts into one debt, they’ve undergone debt consolidation.
Debt refinancing, on the other hand, means replacing a single debt with a new, lower-interest debt. If a business owner has a loan and takes out a new loan with lower interest to pay it off, then they’ve undergone debt refinancing.
That said: the two concepts aren’t mutually exclusive. An individual can refinance a debt consolidation loan, and they can consolidate refinanced debts. Theoretically, they could even refinance all of their debts and then consolidate them.
Still, it’s important not to get the concepts confused. Both have different benefits and best use cases.
Pros and cons of small business debt consolidation
While consolidating small business debt might sound great on paper, remember that every financial decision a business owner makes has pros and cons.
Pros of consolidating business debt
The basic pros of consolidating small business debt are the same as consolidating personal debt: dealing with a single creditor, lowering interest rates, and getting some financial breathing room.
Often, the worst part of being in debt isn’t actually being in debt; it’s keeping track of everything. An individual or a business might have multiple monthly payments that go out each month at different times, eating away at their bottom line. If they begin to miss payments, they hear about it from multiple different creditors who all think that they can harass them into paying up. The stress can be overwhelming for any business owner.
When they consolidate their debt, they only have to deal with one creditor, which makes managing their debt much easier. They have one payment to make each month, which is easier to stay on top of. If for some reason they’re falling behind, they only have to make one phone call to work out a solution with the sole lender. This is a huge deciding factor that contributes to why many people decide to consolidate their debts.
Lower interest rates
Consolidating debt also often comes with the added benefit of lowering interest rates as well. Lower interest rates aren’t a guarantee, but they are common. Individuals seeking consolidation should be on the lookout for the best interest rates when they’re weighing their consolidation options.
After all, when it comes to debt, it’s not usually the principal amount putting businesses under; it’s the interest, as our debt calculator shows.
Financial breathing room
One of the major benefits of debt consolidation is also one of the hardest to quantify. When an individual consolidates their debt, they reduce the pressures of dealing with so many different payments going out to so many different creditors. Ideally, they’re paying less per month, giving them more resources for future planning. In short, consolidating their debt can give them the much-needed financial breathing room they need to figure out the years ahead.
Cons of consolidating business debt
Small business debt consolidation isn’t for everyone. Major potential downsides exist that business owners should be aware of before they take the plunge. This includes things like extended terms and the fact that consolidating debt doesn’t address their real problems.
Extending the terms of debt can be a good thing in some situations. By stretching payments out over a longer time period, an individual can reduce their monthly payments and keep more money in their pocket.
That said, debt consolidation is a business decision with long-term consequences. Some consolidation companies offer longer terms, not as a way to help a business, but as a way to draw out the payment period and collect in extra interest. Individuals end up paying far more than they have to for their loan.
Before signing on the dotted line, business owners should consult their long-term financial projections and ensure that consolidation makes sense for their next 10 years, rather than just for their immediate future.
Doesn’t address the real problems
People don’t end up in debt for no reason, and neither do businesses. Their debts came from somewhere.
If businesses have to deal with an emergency or an unforeseen circumstance and need to borrow money just to get by, that’s one thing. However, if individuals are making unwise decisions for their business by spending spontaneously and not being pragmatic about their business’s future when borrowing, then they have a lack of financial discipline on their hands.
Debt consolidation won’t solve those kinds of foundational problems. In fact, it will probably make them worse. By making the debts they’ve irresponsibly run up easier to deal with, it allows business owners to keep making bad decisions while staving off the inevitable: financial disaster. If they consolidate their debt but don’t change their tune, they’ll just be worse off for it in the future.
How to get small business debt consolidation
Are you ready to discuss your business debt consolidation options with a professional? National Debt Relief is here to help. Contact us today to discuss your options and figure out the best solution to reach financial stability.