A refinancing tactic in which new loans are taken out to pay off existing debt. The new loan combines existing debts to create one single large debt. Consolidated debt often has more favorable terms, including low-interest rates and a lower monthly payment.
What is Debt Consolidation and how does a business use it?
For a business to consolidate debt, a separate loan would have to be acquired. This loan is then used to pay off the already existing loans and debt the business had.
Taking on multiple loans and the need to have better management of finances tends to drive the need for debt consolidation.
A business will want to make sure that the loan covers the outstanding debt attempting to be consolidated.
What Is Debt Consolidation?
Cash flow isn’t always a constant, and this is the same whether a business is brand new or if it has been around for a few years or longer. Unexpected incidents happen from time to time and the need to take on a business loan is something that could occur
If a business has resorted to taking on a few loans, it could be looking at making multiple different payments every month. This means there needs to be a system for tracking balances, different due dates, and interest. On top of running a business, the management of multiple loans could be too much to handle. This is where debt consolidation comes into play.
Debt consolidation takes what could be multiple payments and repackages them into one. This finance tactic helps some business further manage their money by allowing for just one easy payment.
How Does Business Debt Consolidation Work?
For a business to consolidate debt, a separate loan would have to be acquired. This loan is then used to pay off the already existing loans and debt the business had. By doing this, this moves many different debts into one simplified monthly payment
More often than not, business debt consolidation works much like personal debt consolidation. It's important to remember that when looking for a means to consolidate debt, to find a loan that offers lower interest rates than what is currently being paid upon.
Additionally, a business will want to make sure that the loan covers the outstanding debt attempting to be consolidated.
Debt Consolidation vs Refinancing
While consolidation and refinancing are very similar, there are a few differences to note
Consolidation: This is when a business replaces many different types of debt, to also include loans, into a single loan. When the business receives funds from the new loan, it would be immediately used to pay off existing debt.
Refinancing: When a loan is taken out to replace another one, and more often than not this is done due to better repayment options and lower interest rates.
Should A Business Consolidate Debt?
Is there value for a business to consolidate its debt? This option may be the right choice for streamlining payments but it is pertinent to have a full understanding of the financial options available before making a choice.
Having debt from multiple sources can be an overwhelming experience. If the business is suffering, they may want to consider a business debt consolidation plan. With multiple methods to choose from, the best truly depends on the maturity of the business and its needs. Make sure to review all options in regards to business debt consolidation and go with what makes sense for the business.