If you run a business or own one, you know that you sometimes have to operate while facing debt. This is not the worst thing ever if you feel like you have a viable path to becoming solvent again at some point. It’s when your business doesn’t seem like it’s ever going to make a profit that you might need to consider raising the white flag and trying something else.
One way that you can simplify your finances is business debt consolidation. Some business entities find that it helps them immensely.
However, this is by no means a one-size-fits-all prospect. Let’s talk a little bit about what business debt consolidation is, and whether it’s a smart choice for you at this juncture.
What Exactly Is It?
Before we dive into the pros and cons of business debt consolidation, you need to understand precisely what that term means. Business debt consolidation:
- Is when you take out a new loan
- Is when you use this new loan to pay for any outstanding business loans and debts
The idea is that you’re streamlining the debt payment process. You now have one entity to which you owe money, rather than several.
Some of the Major Benefits
There are potential benefits of going in this direction that we should mention. For instance:
- It simplifies things from a bookkeeping standpoint
- You can often locate a lower interest rate
Many entities will give you loans and credit extensions, but they will charge you exorbitant rates. It’s very tough to get out from under those loans and debts if you keep getting buried under that interest every month.
There’s also the cash flow situation. If you have multiple outstanding loans and debts, you’re not able to have as much money on hand for business expansion.
When you only have one payment to make every month with reduced interest, you have more ready cash for new initiatives, to hire more employees, and to launch ambitious marketing strategies.
They Improve Your Credit Score
One other significant pro with business debt consolidation is that it can raise your credit score over time. If you have a fantastic credit score, and you own or operate a business, then that opens up tons of exciting possibilities for you.
With debt consolidation, it’s easier for you to know exactly what you’ll owe each month. If you can pay it every time, then your credit score will go up bit by bit. Various business entities will have no problem partnering with you if you can show you’ll stick to a deadline.
You’ll Have to Deal with a Longer Payment Period
On the other side of things, while it’s nice to know how much you’ll pay every month, and you only have that one loan on which to focus, you’ll also likely have to pay for a longer time.
If you have multiple short-term loans, then they usually come with higher interest rates, but you may be able to pay them off in three months, or six, or a year. With a single, consolidated business loan, you’ll probably be working it off for a much longer time.
It’s much like when you buy a car. If you want to pay smaller amounts each month, it will take you longer to pay off the vehicle. You’ll have to decide whether it’s more onerous to pay more for a shorter time, or less each month for a longer one.
It’s Not a Miracle Solution
You should also know that while a business debt consolidation measure might simplify your life somewhat, it won’t suddenly make your business solvent.
If your company is struggling, then just because you took this measure, it does not mean that you’ll have a new customer base all of a sudden. It doesn’t mean that your promotions will start working, or that you’ll suddenly achieve brand recognition.
You can use debt consolidation to get yourself pointed in the right direction, but you still need a sound business model and strategy. That goes along with hiring the right people and offering a service or product that people want. Without those things, it doesn’t matter much whether you consolidate your debt or not.
This sort of action is not appropriate for every company or business owner. You’ll need to carefully assess your needs before you move forward. Weigh the cons and pros, and then, if it seems logical, research some entities that would be willing to give you a new consolidated loan.