Almost every business will have debts of some kind, and it is nearly impossible to run a company without incurring some debts along the way. Having various debts with different lenders can be both confusing and expensive. As a business, it can be a struggle trying to pay off a selection of loans and lenders and can make planning your finances a difficult task.
Business owners want their debts to be both manageable and affordable, so as they don’t interrupt the day to day running of the company or hinder the company from growth. Debts that were not a problem when you first took them out can being to cause problems later down the line as situations change, and it is easy to become overwhelmed with various different debts in the form of business loans and credit cards.
Consolidating your business debts can be a really effective way of making them more manageable and can even end up saving you money. This guide covers what business debt consolidation is, how it works and why it could work for you.
What is business debt consolidation?
Business debt consolidation is a type of business loan that combines multiple different debts into just one loan. Instead of having various different lenders and having to make different payments for each debt at different dates and times, you can have just one monthly payment to one lender.
For example, if you are currently paying off a business loan at the start of every month, a credit card at the end of every month, and a weekly line of credit, you could use debt consolidation to combine all of these things into one monthly payment to one lender.
By consolidating your debts into one place, you can often obtain a lower interest rate than you have on your various other debts which will reduce your overall payments.
If you took out a loan or finance agreement when you first started a business several years ago, you might be paying high-interest rates because of a low credit score or short time being in business. By consolidating these debts once your situation has improved, you may be able to access better rates and reduce your payments.
How does business debt consolidation work?
When you choose to consolidate all your business debts into one loan, you will be taking out a new loan with fixed monthly payments and a planned payment schedule. This makes managing your business finances much easier as you will only have one predictable payment to make every month, as opposed to various different debt payments.
When you take out a debt consolidation loan, you are using your new loan to pay off your existing debts, so you will no longer owe anything to your previous lenders. You will then have all of your debts combined into one larger loan which you can pay off over a fixed period of time.
Debt consolidation is often confused with refinancing, and the terms are sometimes used interchangeably, but it is important to understand that they are two different things. Debt consolidation can be seen as a type of refinancing, but not all refinancing can be called debt consolidation.
Debt consolidation refers to when you are combining multiple existing loans into just one new loan. Refinancing could also be replacing one loan with a brand new loan that has a lower interest rate, but as there is just one loan involved it is not debt consolidation.
Debt consolidation does not always result in a lower interest rate, and it does not always save you money. The main point of debt consolidation is to make debt repayments more manageable, as opposed to saving yourself some money on interest.
Why consolidate business debts?
There are various reasons why consolidating your business debts can help your business thrive, including:
- Better repayment terms: When you have multiple debts to pay off, you will likely have various repayment dates and amounts to keep track of on a regular basis. By consolidating your debts into just one loan, you will have only one regular payment to make.
- Reduced rates: In some cases, consolidating your debts can save you money by reducing your interest rates and fees. If your credit situation has changed since taking out your loan, then you might be eligible for better rates now.
- Improve cash flow: When you consolidate your business debts, you will be able to better manage your business finances by keeping track of just one payment. Also, if you can save money on your interest and fees by consolidating, then you can invest these savings back into your business.
Before deciding if consolidating your business loans is the best option for you, you should look at all your options and work out which is best for your business. In some cases, business consolidation loans can actually end up being more expensive than having a number of other loans, so compare everything before deciding.