Consolidating Your Business Debt

Consolidating your debts can be a huge help when it comes to maintaining control of your financial situation, and knowing when you’re in trouble is key to avoiding large debts and even bankruptcy.

What is debt consolidation?

Debt is part of any business. And while sometimes it’s easy to manage, other times having multiple debts can be a nightmare. Debt has the potential to put some companies out of business, as it’s much harder to get out of debt than it is getting into it.

Debt consolidation is the process of combining all loans into one so you can minimise expenses by reducing interest and fees, thereby ensuring your credit is easier to manage. Essentially, it means taking out a new loan, using the new loan to pay off the old debts, and then repaying the single lender.

Benefits of debt consolidation

• One single repayment – Rather than making multiple repayments to multiple lenders, you’ll be making a single payment based on one interest rate. This will save you money over time.
• Reduce stress – Having to pay multiple lenders large amounts at different times can be very stressful and confusing. By having a single debt, you’ll also avoid creditor collection calls if you’re falling behind.
• Lower rates and additional savings – With one interest rate, payment is pushed out over a longer period of time, meaning you’ll pay less each time than you were previously. Additionally, by consolidating you’re avoiding the extra interest fees, charges and penalty rates that add up if you can’t pay all your bills on time.
• Extra features – The possible access to extra features, for example a fixed interest rate or locking in repayment amounts.
• Alternative to filing for bankruptcy – Avoid bankruptcy, which can be detrimental to your credit history.

Disadvantages to debt consolidation

• Getting deeper into debt – Debt consolidation essentially lets you borrow more money, which could force you into even deeper debt. For example, you may be tempted to put more charges onto your credit card once that debt is consolidated.
• Foreclosure – If you enter into a secured debt agreement by using an asset such as your business premises as security, if you don’t pay back the new loan you could lose the property.
• Dodgy lenders – Not everyone out there is created equal. There are brokers and lenders who may take advantage of people who are desperate to fix their situation. Be smart about who you deal with, and always ask questions.

What to consider when consolidating

Fixing your debt troubles isn’t as easy as simply consolidating, as there are a number of factors you need to consider when deciding whether this route is fit for your circumstances.

Affordability is a huge consideration. Will you be able to meet the requirements for debt consolidation? Remember there may be additional fees and charges you may have to pay to set the process going, especially if you have fixed rate loans.

Always compare your options. Look at the costs, interest rates and loan terms of several lenders before deciding who to approach. It’s essential that you understand exactly what you’re signing up for especially when it comes to interest rates and costs – if these aren’t lower than what you’re currently paying, consolidating may not be worth it.

Steps to take

• Understand your current repayments – Collect all of your credit statements, loan statements and bills together so you understand what the business currently pays and owes.
• Put the debts in categories – Does the debt need to be paid now or can it be put off? It’s ok to consolidate some debts and not others.
• Compare the interest rates, charges and terms and conditions of all potential debt-consolidation options – Don’t settle for the first one you stumble across. You’ll find there will be one lender that will suit your business situation more than others.
• Work out a plan – You’ll need to work out debt management plans with any creditor you have. It’s important to work out a debt agreement plan that both suits you and is manageable. It’s also important to work out a budget to ensure any debt consolidation repayment plan is practical for your circumstances. Work out how much you’ll need to pay each month to ensure the debt is paid off and stick to it.
• Make extra repayments if you can – If your consolidation loan allows for it (there are some that don’t allow extra repayments), make additional repayments when you can afford to. It means your loan could potentially be paid off sooner and you’ll save on interest. Just make sure you won’t be charged fees for extra repayments, lump sum payments or early repayments, as this could be the case with some loans.

Cut down

A debt consolidation loan seems like the perfect solution to a debt problem. But remember, it may not suit all business circumstances and it may not be the right answer for you.

And if you do choose to consolidate, it’s just as important to cut down on your expenditure to ensure you don’t end up in the same bind down the track.

For assistance with managing your business debts and business debt consolidation, contact the experts at Australian Debt Solvers today.