Large and small businesses often encounter challenges when it comes to loan repayments. Failing to repay these loans can result in huge losses to the business. This is where business debt consolidation comes in.
What Is Debt Consolidation?
Business debt consolidation is the process where a company applies and obtains a bigger loan in order to pay off smaller loans. By applying for the bigger loan, the company simply brings together smaller loans into one combined loan that consists of one monthly payment. Since it is bringing all the debts together less than one roof, the action is referred to as “consolidation.” This is where the term debt consolidation comes from.
In a technical perspective, it is not possible to bring different loans together. This is because each loan has its own interest rate and terms. What happens is that the company applies for a bigger loan and uses the money released to pay off all the smaller debts. Once all the debts are paid, the company remains with only the larger loan to repay.
The Advantages of Debt Consolidation
The advantages of debt consolidation include the following:
- It allows you to become more organized. You bring together several small debts into one bigger debt, reducing your bookkeeping needs and making you more organized. Not to mention, you no longer have to think about which lender to be paid first and how much you should pay.
- Affordable interest rate. Having many loans means you will pay multiple interests every month. This can be very expensive when summed together. Debt consolidation enables you to pay interests for only one loan. This will save you a lot of money.
- Reduced monthly payments. Just like interests, you will find that you are paying a lot of money per month if you have multiple loans. This can be really overwhelming if you have cash flow problems. Debt consolidation, when spread over a long period, has lower monthly payments.
The Disadvantages of Debt Consolidation
The disadvantages of debt consolidation are:
- More debts. There is a likelihood you will find yourself with more debts if you are not careful. There will be a lot of money that is free, and this might make you to spend beyond what you can afford. Make sure you save up the money that is freed as a result of debt consolidation to earn more money.
- You pay more. Though debt consolidation reduces the interest rate and the amount you pay per month, you will find that you are spending more in the long run. In this case, you need to be organizing and pay the consolidated debt as fast as possible.
- Your credit score can be affected. Debt consolidation companies sometimes work as settlement negotiators. If you are paying them a huge amount of money, they may hold it and intentionally become delinquent on the money they are holding. This can damage your credit score and history.
Debt consolidation is one of the few ways you can explore to reduce the number of debts you have. It can greatly help you save a lot of money in interest and monthly repayments. However, it can lead to more debts and even damage your credit score if you are not careful. Before you go for business debt consolidation, you need to weigh all the factors to help you determine if you really need it. You can call a financial expert to advise you accordingly.