Advantages and Disadvantages: Business Debt Consolidation

This article discusses the pros and cons of consolidating your business debt with a new loan. It will help you make a better determination whether debt consolidation is the right solution for your company.

To learn more this solution, read “How does business debt consolidation work?

Advantages

Debt consolidation offers seven advantages to small business owners. A well structured debt consolidation package:

1. Allows you to comfortably handle your monthly debt payments

Companies look for debt consolidation when demands from their existing loans become untenable. Consolidating their debt allows business owners to lower their monthly payments. The new payment is designed to be more manageable than prior debt payments, alleviating financial stress. This is the main reason why companies get this type of financing.

2. Improves your cash flow

The smaller debt payment has a lower demand on your company’s cash flow. This frees up funds that can be deployed for other uses. The freed up cash flow will help you pay suppliers on time, ensure you never miss payroll, and help you grow the company.

3. Enables you to focus on growth (rather than just staying afloat)

The improved cash flow provides you with better control of your company’s finances. You will not longer need to spend time juggling supplier payments, delaying payroll, or postponing new projects. Instead, you can focus your attention to growing your business and finding new clients.

4. Lowers  interest rates and/or extends debt terms

The debt consolidation package can reduce your company’s monthly payment in a couple of ways. It can extend the loan term over a longer period of time. Alternatively, it can provide a lower interest. In some cases, it can provide both. Regardless, the end result is a more manageable payment.

Note that extending a loan’s term is both an advance and a disadvantage. We discuss the disadvantage of this in the next section.

5. Can be structured to support future growth

When structuring a consolidation package, companies should aim to accomplish two objectives. The package must handle the current financial situation. This is why you are getting it in the first place. However, the financing package should also handle some of your future financial needs. Forecasting future needs can be difficult if the company has a debt problem right now. However, it’s critical to do both things at the same time.

Consequently, most transactions should have two financing tiers: a consolidation tier and growth tier. This provides the business with current stability and with future financial support. A well structured debt consolidation package can do this and provide a solid platform for growth.

Implement the growth tier at the time you get the consolidation loan. This step is important and requires a special expertise. Getting growth financing after getting a consolidation loan is very difficult for a number of reasons. Thus, the timing and structure are important.

6. Is available to small businesses

This type of financing is available to small companies. We can work with companies that:

  • Need at least $500,000 of financing
  • Have 3 years of business history or more
  • Have up to date taxes (or a payment plan in place)
  • Have equipment and/or real estate

7. Is easier to manage

Debt consolidation solutions may either have a single payer – or two payers if they have a growth tier. This makes them easier to manage than the prior situation of having multiple loans with different payment dates.

Disadvantages

This option isn’t a perfect solution to your financial problems though. It also has some potential disadvantages. They:

1. Extend the term of your debt

In the prior section we mentioned that longer payment terms could be an advantage. They reduce your monthly payment, which can help stabilize your business. But this comes at a cost. The total cost of all the payments made over the life loan will usually be higher. This trade off needs to be examined closely to ensure it is beneficial for the company.

2. Require discipline avoid repeating past problems

Companies that got into trouble by getting too many loans need discipline to avoid repeating that mistake. This isn’t always easy. Every company has financial ups and down. And getting ‘easy financing’ during a down term may be tempting. However, ‘easy financing’ may come at a high cost (e.g. cash advances).

Lastly, you won’t be able to get a new debt consolidation loan if past problems repeat themselves. Ultimately, this could mean business failure.

3. Don’t fix a bad business model

Lastly, consolidating your debts into a sustainable package can fix previous financial mistakes. However, it won’t fix a bad business. If your business model is flawed or has other problems, debt consolidation won’t help. Instead, it will simply push those problems to the future.

Seek competent advice

If you are unsure if debt consolidation is right for your company, seek the advice of an expert. Investing money in expert advice is a small price to pay to ensure you make a good decision. A good accountant/CPA should be able to give you the right guidance.

Looking for business debt consolidation?

For information about our business debt consolidation program please fill out this form – a specialized agent will contact you.