Dealing with outstanding loans and payments? Taking control of your business debt is tricky, especially if you are caught in a cash flow trap of using loans to pay off other loans. How do you tackle all of this debt? Debt consolidation may be the answer for you.
Understanding Debt Consolidation
Debt consolidation is when you take out one loan to pay off all of your existing loans. This consolidates the debt into one place so instead of making multiple payments to different places, you only need to make one monthly payment for all your debt. This is convenient and can potentially help business owners lower their interest payments as well as restructure their timeline.
What About Refinancing?
Refinancing is when you take out a new loan to pay off a current loan at a lower interest rate. The difference between debt consolidation and refinancing is that with debt consolidation, all the loans are combined into a single loan. In essence, debt consolidation is considered a form of refinancing.
Is Debt Consolidation Right for Me?
Here are a few scenarios where you may benefit from debt consolidation:
- Are you interested in getting a lower interest rate?
- Do you have multiple outstanding loans?
- Do you want to extend the timeline of your short-term loans?
To qualify for debt consolidation, you will generally need to have a strong credit score.
Debt Consolidation – Where Do I Start?
Making smart decisions about your business debt is crucial. Below we offer some tips on whether debt consolidation is right for your business and explore the drawbacks.
List out all of your business debt and loans.
- Know your current payments and all of your outstanding sums. Using a loan amortization schedule can help you make a sound decisions based on real data.
- What amount do you want to consolidate?
Are there penalties for paying off a loan early?
- Understand the fees and whether this would make debt consolidation more costly.
Compare Effective APRs
- Using the Effective APR can make comparing different loan products easier, and can help you understanding whether taking out a loan is good for your business in the long run.
- You’ll want to explore all of your options from different lenders first to see if they can offer you a product that meets your needs. Make sure you understand the rates, calculations, and the terms of the different products.
Once you’ve decided on a product that will benefit your business, take the next step to get approved for the loan. Once your loan is approved, you will have immediate access to that cash – and it is a good idea to pay off any of your existing debt with the capital you’ve received. This now consolidates all of your business debt into one lender.