It's the risk every entrepreneur takes. You've done your homework. You have a great business model. You secure financing--through a few business credit cards and a small business loan, perhaps--that seems reasonable based on your expected revenue. And for a while, business is going great. You're making your loan payments, still turning a profit--but then, something happens. Sales are down, or costs go up, and suddenly your current debt repayment plan becomes totally overwhelming.
Sound familiar? If an unexpected change in cash flow has put your business at risk of bankruptcy, or simply affected your ability to pay back existing debt, you may be able to benefit from a debt consolidation strategy.
What is debt consolidation?
Simply put, debt consolidation is the process of combining multiple existing lines of credit and loans into a singular account at the lowest possible interest rate. Typically, this is achieved by using funds from a new loan for the purpose of paying off all other debts, so that the only remaining debt to be paid is the new, consolidated loan.
Is a business debt consolidation loan right for me?
If you're overwhelmed by calls from multiple creditors, consolidation can be beneficial because instead of dealing with several accounts, you only have to worry about one. And you may be eligible for a business debt consolidation loan at a lower interest rate, allowing you to make more manageable payments each month, with a greater percentage of your payments going toward the principal (the original borrowing amount) versus simply paying for the monthly interest accrued.
What are the downsides of business debt consolidation?
As with all business financing solutions, there are pros and cons to debt consolidation. So before you apply for a business debt consolidation loan, it's important to do the math for your particular financial situation and make sure you're getting a good deal. A financial advisor can help you compare the details of the new consolidation loan with your existing loan agreements. This will include comparing the interest rates, monthly payment amounts and any fees associated with the new loan. You'll also want to consider the term of the loan, since the length of the loan can impact the effective annual rate of interest.
Ultimately, the goal of a business debt consolidation loan is to make your company's debt situation more manageable by reducing the amount of creditors you're dealing with as well as lowering the amount you pay daily or monthly (which improves your overall cash flow). If the new business debt consolidation loan agreement doesn't achieve both of those goals, it likely isn't a worthwhile solution for your situation.
Ok, I'm in. How do I go about consolidating my business debt?
If you think a business debt consolidation loan may be the right solution for your company's current debt situation, you can choose from a number of for-profit debt consolidation companies to broker your new loan. The consolidation company is responsible for negotiating the new loan on your behalf, collecting payments from your business and paying off your previous creditors. These organizations act as intermediaries between you and your previous creditors--so if you're currently receiving regular calls from creditors, those should stop soon after your business debt consolidation loan is approved.
Keep in mind that debt consolidation loans are available as secured or unsecured--the difference being that secured loans require collateral (such as your home or another significant asset), whereas an unsecured loan does not. A secured business debt consolidation loan may offer a lower interest rate and therefore seem more appealing than an unsecured loan. But if your business is in serious trouble, that reduced rate may not be worthwhile. If your business were to default on the secured consolidation loan and go bankrupt, you could risk losing your home as well as your business.
As unexpected challenges arise in business, dealing with out-of-control debt can be a scary process. Take the time to consult a qualified financial advisor and weigh all of your options. Every business and every financial situation is different--so before making the choice to consolidate your business debt, it's important to consider the ramifications of every available option.