When is Debt Consolidation Right for Your Small Business?
How does small business debt consolidation work? How do I find out if debt consolidation is the right decision for my business? When you decide to choose a business debt consolidation loan, you will work with a lender to take out a loan large enough to pay off your other debts. Once your other debts are paid off, the only remaining debt payment you have is the new business loan; as such, you have consolidated your business debts into one payment.
If you are in a position where you have multiple debts to various lenders, you can determine the benefit of business debt consolidation by evaluating your current debts; determining the payment amounts, remaining terms, and interest rates. Keep in mind the purpose of debt consolidation is to increase your business cash flow.
The goal of a small business debt consolidation loan is to increase your monthly cash flow by reducing your debt payments.
Debt consolidation is a very common goal for small businesses that have taken out short-term business loans or a merchant cash advance.
Business loan consolidation typically results in lower payments. A lower payment can ease current strains on your business' cash flow. That means you will have more cash available for normal operating expenses and unexpected opportunities. All else being equal, small business consolidation loans result in lower payments because they have a longer repayment term. If your goal is to lower the amount you're paying on your debt each month, then debt consolidation will probably be the best option for you.
One of the results of lower payments is having the ability to qualify for additional borrowing and longer repayment terms. This increases the business' debt service coverage ratio. Typically, it is not uncommon for small businesses to require some additional working capital when consolidating business debt. The additional working capital should help them deal with the unexpected or help them afford needed equipment. A business consolidation loan can help you better manage cash flow in the following ways:
Instead of dealing with multiple creditors, you will now manage a single account. You will now have one payment. The lower longer repayment term will result in smaller debt payments.
These benefits should give you more cash in the bank to cover regular expenses. This will not only improve your financial situation, but it will also smooth out your cash flow management process.