Using debt to leverage business growth and profitability is very common. As long as the business generates enough cash to cover the principal and interest repayments, everything is fine. However, if the business does not do well due to any reason, finding enough cash for the debt repayment can be tough. The situation may force the owners to take on more debt to repay the earlier ones.
If the business takes on too much debt, it might force a business closure causing substantial losses to both the owners and the creditors. If a debt trap threatens the existence of your business, you could look at debt consolidation to bail you out. Take a look at its pros and cons:
What Is Debt Consolidation
Consolidation of debt involves combining all the outstanding terms loans, personal loans, credit card dues, lines of credit, etc. into one single amount. Typically, a new loan is taken out with a private lender for the sum of all the dues and all the individual loans, and dues are paid off.
Typical Benefits Associated With Debt Consolidation
Single creditor: After paying off all individual loans, you are left with only one creditor, the lender of the new loan. As a business owner, you are freed of the responsibility and effort of monitoring multiple creditors and remembering to make the monthly payments in time. The debt consolidation agency will take on the task of paying off the individual debts as required. With only a single payment to be made every month, it is easily ensured that the payment is made on time.
More affordable monthly payments: If most of your earlier debts were in the form of credit card dues and high-interest personal loans then debt consolidation will usually be able to give substantial debt relief. The new loan will invariably carry a far lower rate of interest making the monthly payment more affordable. You can also lower the monthly payment by opting to extend the repayment period.
Why Debt Consolidation May Not Be Ideal
Extended period of repayment: In your effort to keep the monthly payment very low you can often end up extending the loan repayment too long. This will mean that your loan will take far longer to wind down, and you will actually be paying far more interest in dollar terms over the total period.
Not a cure to the ailment: At best, debt consolidation is purely a short-term arrangement for tiding over the bad times when your cash flow is insufficient to repay your debts. While you can take the advantage of lower interest rates, it does not take away the fundamental truth that you have taken on too much debt than your profits will allow.
Whether you opt for debt consolidation or not is a matter of evaluating alternative sources of funds. If you do decide to undertake consolidation, it is very important that you find a reliable agency that will not only give an attractive interest rate but also terms and conditions that are reasonable and transparent.