Debt Consolidation for Businesses | Quick Guide
Are you a small business owner with multiple debts? If yes, then we can understand how tracking so many debts and their interest rates can be stressful. In addition, these ever-rising rates can also adversely affect your business’s cash flow. That’s why debt consolidation for businesses is becoming a popular solution for this.
Read on to find out what debt consolidation is, as well as its pros and cons for your business.
What is Debt Consolidation for Businesses?
Debt consolidation for businesses basically allows a company to combine many debt payments into one large loan. This means that you, as a business owner, will only need to make one loan payment per month. Since one loan is easier to handle, you’ll have more time to focus on the growth of your business.
In addition, some debt consolidation loans often allow a lower interest rate. This can help you save money to invest in your business.
How Does Debt Consolidation Work?
The most common way for debt consolidation is to take out a big loan. This could be a personal loan or a home equity loan. Then, use this bigger loan to pay off all your smaller debts.
You can also consolidate debts of multiple credit cards into a new high-limit credit card. Just transfer the balances of the older cards into the new ones. This can even get you an incentive of a 0% interest rate on the card for some time.
Does Debt Consolidation Hurt Your Credit?
Yes, there is a chance that a debt consolidation can hurt your credit. This is because when applying for a consolidation loan, you’ll require a hard credit check from the creditor or lender. This will knock off a few points of your credit score.
However, it’s important to note that this decline is usually less than 5 points and is temporary. Once you start to make consistent loan payments on time, the score will start to recover. Just make sure not to miss or be late with any payments.
Pros and Cons of Debt Consolidation for Businesses
To better understand if you should go for debt consolidation, it’s important to know its advantages and disadvantages.
Pros:
The pros of debt consolidation for businesses include the following:
- You’ll only need to make one payment a month, which is easy to manage and can be automated.
- Applying for a debt consolidation loan with a low interest rate can help you pay off your principal faster.
- With debt consolidation, you can often opt for a lower interest rate or fixed interest rate. This makes the payments more predictable, allowing you to make a savings plan.
- It can aid in improving your business’s cash flow.
Cons:
Now, let’s discuss what are the cons of debt consolidation for businesses:
- Debt consolidation can decrease monthly payments but, in turn, increase your payback period. So, the chances of getting new loans will significantly decrease for that duration.
- Consolidating your debt means you’ll have a lot of cash for your business. It’s important to be wise about what you use it for, or you’ll fall more into debt.
- The initial credit check required for debt consolidation will hit your credit score.
Conclusion
If you are tired of hassling with multiple debts and interest rates, debt consolidation can help simplify things. However, it’s important not to take the new debt lightly and to be consistent with its payments.
Also, be strategic when choosing the type of debt consolidation for businesses. Preferably, go for one that has a lower or fixed interest rate. This will help you pay the debt off quickly and also save you some money to invest in your business.