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How to Consolidate Your Business Debt

10 July 2017 No Comment

If an unexpected cash flow problem occurs, it might put your business at risk of bankruptcy. Even if this does not happen, your ability to repay existing debt might be affected. As a business owner, you should try debt consolidation.

What is Debt Consolidation?

Simply put, it refers to taking out a single loan to pay off multiple high-interest loans. When you consolidate your debt, you will be replacing multiple payments with a single one. Aside from the convenience, debt consolidation allows you to reduce your interest payments and the timeline for paying off your debts.

Difference between Refinancing and Debt Consolidation

Debt refinancing and consolidation are used together most of the time. In some cases, borrowers and lenders use the terms interchangeably. Although they share similarities, these terms do not have the same meaning.

Refinancing means taking out a new loan at a lower interest rate to pay off your existing high-interest loan. On the other hand, debt consolidation is the process of refinancing all your loans into a single product. Therefore, debt consolidation is a type of refinancing but not all refinancing is debt consolidation.

Why You Need Debt Consolidation

Most borrowers who look for debt consolidation fall into three groups, which include those who:

Misunderstand the Original Terms of the Loan

Borrowers find themselves misunderstanding the original loan terms. You can easily misunderstand loans because of the different types of amortization schedules, interest rates, and fees. Your loan’s effective APR might be cheaper than you think.

If you are dealing with business debt that you do not understand, you are not alone. As your problems compound, you will be left with several high-interest loans to pay.

Get Caught in a Jam

In other instances, you might know what you are getting yourself into but cannot avoid it. Whether you need money for an emergency or cash flow issues, you might find yourself in a situation where you need cash fast. In such instances, you will find yourself taking on expensive debt for the sake of your business.

Once the emergency passes, you need to shop for inexpensive loans with low interest to repay your high-interest loan.

Over-Leveraged Multiple Sources of Debt

You might be one of those borrowers who take out multiple loans at exorbitant rates. Unfortunately, not much can be done to solve this problem. People who take this route usually have bad credit, which makes it hard for them to qualify for a low-interest loan.

Are You a Good Debt Consolidation Candidate?

Before you start looking for where to get debt consolidation loan, first you need to have the following characteristics:

You have several outstanding loans – If you are currently paying off more than one loan and cannot keep up, you should take out a single loan to pay them off.

You want to pay off high-interest loans – if your current loans have low interest rates, you might not get a better rate if you choose to consolidate. You are more likely to get a better rate from loan consolidation if your current loans have high rates of interest. Of course, your interest rate will vary depending on your annual revenue and credit score.

Your personal credit score is strong – your personal credit score plays a big role in determining whether you will find a debt consolidation loan and the interest rate that you will get. If your interest is low, you might not find a better rate than what you have.

You want to extend the payments for short-term loans – if you have several short-term loans, you should consolidate with a single loan to extend your payments.

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