This article discusses the pros and cons of consolidating your business debt with a new loan. It will help you determine whether debt consolidation is the right solution for your company.
To learn more about this solution, read “How Does Business Debt Consolidation Work?”
Debt consolidation offers seven advantages to small business owners. A well-structured debt consolidation package:
a) 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. A lower monthly payment is the main reason why companies get this type of financing.
b) 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 helps you pay suppliers on time, helps ensure you never miss payroll, and helps you grow the company.
c) 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 no longer need to spend time juggling supplier payments, delaying payroll, or postponing new projects. Instead, you can focus on growing your business and finding new clients.
d) 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 rate. 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 advantage and a disadvantage. We discuss this disadvantage in the next section.
e) 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 arrangement 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 when 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.
f) Is available to small businesses
This type of financing is available to small companies and the requirements are fairly simple. We can work with companies that:
- Need at least $500,000 of financing
- Have at least 3 years of business history
- Have up-to-date taxes (or a payment plan in place)
- Have equipment and/or real estate
g) Is easier to manage
Debt consolidation solutions may have a single payer – or two payers if they have a growth tier. This flexibility makes them easier to manage than the prior situation of having multiple loans with different payment dates. For more information, read “How to Get a Business Debt Consolidation Loan.”
Debt consolidation isn’t a perfect solution to your financial problems though. It also has some potential disadvantages. They:
a) 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 stability 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.
b) Require discipline to avoid repeating past problems
Companies that got into trouble by getting too many loans need discipline to avoid repeating that mistake. This discipline 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” (e.g., cash advances) may come at a high cost.
Lastly, you won’t be able to get a new debt consolidation loan if past problems repeat themselves. Ultimately, this could mean business failure.
c) 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 simply pushes 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 refinancing and consolidation program please don’t call the number above. Instead, fill out this form – a specialized agent will contact you.