No wonder if you hear this question from your grown up offspring. The world of business is changing at a faster pace and there are many new ways coming up in terms of dealing with business execution and contingencies. As a business consultant, I too come across this same question many times as people used to ask whether debt consolidation is a right approach to their business.
Nowadays, we can see that a lot of small businesses and even large corporations struggle with loan repayment. There is nothing wrong in exploring all available financing aids to support and grow one’s business, but failing to repay debts could result in long-term debts, which may even cause you to lose all the assets that you built over years. So, if you are struggling with a situation of ‘high cost and low profits’, debt consolidation can be a viable option to get rid of your debt chaos.
The concept of debt consolidation
Effectively used by businesses and individuals now, ‘debt consolidation’ is the concept of combining many loans and into a single principal loan, ideally with a reduced interest rate. Simply put, debt consolidation occurs when a debtor, who is troubled with two or more existing loans, takes a new loan to pay off the existing loans by owing to the single new lender. Your offspring’s question in the header is highly relevant as debt consolidation has both advantages and disadvantages to consider. Let us discuss a few points below to have a better insight about it.
Single creditor making it much easier to handle
From the debt consolidation meaning, you may have understood that there is only one creditor to whom you are owed after consolidating. Especially for the small individual businesses with multiple lines of credit, it may become much difficult to receive multiple bills and plan the payouts. Along with helping to cut down the pressure of dealing with multiple lenders, consolidation also eradicates the chance of missed payments, which may put you into deeper debts.
Another advantage of debt consolidation is that the consolidators may put forth loan options with lower interest rates, which will make things much easier for the debtors to afford. Overall, if you fail to pay off the debts at current rates, debt consolidation can offer you an effective way out by stopping loan defaults each month.
Along with the benefits on one hand, debt consolidation may also result in getting you extended loan for long. Many a times the lowered interest rate may end up stretching out the repayment period. You need to have a clear understanding of the repayment and closing or early closure terms before signing up.
Consolidation is a treatment, not a complete cure
In majority of the cases, consolidation is a temporary solution, not a permanent cure for business debts. With debt consolidation, you can lower the monthly payment burden, but it will not work on changing the fundamental issues of a business if it is like spending more than actually coming in. Each of these advantages and drawbacks need to be further evaluated in light of the needs and priorities of your specific business. Along with checking out the interest rates and the terms of the loan, business owners also must explore other possible options such as secured loans and other financial avenues.