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Business Debt Consolidation the Smart Way

It is always a big challenge to manage business debt. However, the usual challenge can very easily get transformed into a nightmare when there are multiple loans that are outstanding and you need to monitor them to make sure they are being paid off as scheduled. The problem gets worse if there are pressures on the business’s cash flow and suddenly you start wishing that you had lesser debt to manage. Debt consolidation can be a very simple and easy method to get your debt under control. Further, if undertaken with care, it has the potential to save thousands of dollars in interest expenses.

Debt Consolidation Explained

In simple terms, debt consolidation is a process of aggregating the debt that the business has taken from multiple creditors and paying them off with a loan of the same amount taken from another lender. By this action, you end up with one single loan that can be serviced with one monthly payment saving you the hassle of monitoring multiple debts. Debt consolidation is invariably done by taking a loan with a significantly lower rate of interest thus saving a lot of interest cost, and further you can adjust the loan period so that that monthly payment becomes more affordable than before.

Debt refinancing and debt consolidation, while being similar, are not the same thing. In debt refinancing the old debt is replaced with new debt carrying a lower rate of interest while debt consolidation is a process of taking a new loan to repay multiple existing loans.

Reasons Why Businesses May Require Debt Consolidation

Typically, there are three main reasons why a business may need a debt consolidation loan to betaken. With a lot of financial jargon and options involved in the loan terms, many small business owners simply become confused and commit themselves to loans that have very steep APRs or restrictive clauses that may interfere with the operations of the business. Another frequentlyquoted reason by business owners is that they were caught off-guard by an unexpected cash flow disruption and simply had no other option but to take on a loan on unfavorable terms because of the urgent requirement of cash. Another common reason is that businesses have taken on multiple loans for various business exigencies at different points in time and now find themselves overleveraged with multiple loans, all bearing high rates of interest.

How to Undertake Debt Consolidation the Smart Way

Like almost every business decision, you need to do a fair amount of homework before making up your mind regarding debt consolidation. To start off, you need to identify all the existing loans so that you can calculate the amount that you would require now to pay back all the loans; this comprises the principal amounts together with any outstanding interest.You can use one of the many online tools to generate a loan amortization schedule or simply ask your lender to give you the information.

Once you know all the APRs of your existing loans, you should try to identify lenders who will extend a consolidation loan with a lower APR. Take some time over this exercise and especially refer to online debt consolidation reviews to identify lenders with the most reasonable interest rates and reputation for ethical practices. When evaluating a consolidation loan, you should remember to factor in the prepayment penalties imposed by your current lender to arrive at the real benefit that would accrue to you.

Another important task involved in analyzing consolidation loans is the APR that takes into account not only the interest rate but also the method and frequency of compounding of interest, and the impact of the various fees and charges required to be paid for taking out the loan. It is only when you compare the APRs of the existing loans with that of the new loan that you would know if the consolidation is going to be beneficial. Avoid paying off existing loans that carry APRs less than the APR of the consolidation loan.

Conclusion

The process of evaluating the most beneficial consolidation loan is not too complex. All you need to keep in mind is that you should only calculate the proper APR of your existing loans and the new loan with which you intend to pack them back. As long as the APR of the new loan is less than that of the existing ones, you can go ahead. The extent of the benefit will depend on your credit score because that will largely determine the loan amount and the rate of interest you are eligible for. Never take a decision in a hurry and without understanding the terms and conditions of the new loan and how they impact on your business cash flows, else you might just be compounding the problem.

This was posted in Bdaily's Members' News section by Charlie Brown .