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The Risks and Rewards of Consolidating Your Business Debts

Poor cash flow isn’t something that any business wants and taking out loans can be expensive in the long run. Interest rates and fees can quickly build up end up costing you— big time. But what if you’ve already got small business debts or loans? In that case, you can consolidate your business debt to cover poor cash flow.

How different is it to consolidate your business debt to cover poor cash flow, and is it expensive? As it turns out, it’s straightforward and it could end up being a whole lot cheaper than paying off your outstanding debts to different lenders. However, what exactly does it mean to consolidate your debt?

The Risks and Rewards of Consolidating Your Business Debts

What Is “Consolidating Your Debt”?

Once a business debt or any debt for that matter, is consolidated, all your outstanding debts will be brought together in one simple loan. Effectively, instead of paying back different lenders at different interest rates and payments, you make one instalment loan monthly payment at one interest rate. This payment is effectively then spread out across each of your lenders in a repayment deal.

In short, you’re still paying everyone back without having to manage multiple business debts. It’s much less stressful than managing a few different small business loans. But how does consolidating your business debt help to cover poor cash flow? As complex as it might sound, that’s a relatively simple question and has a relatively simple answer. Simple doesn’t mean, it has a short answer. Let’s get through into this and understand the real concept of it.

How Can Consolidating a Debt Help Your Cash Flow?

Paying back a few business loans can cripple your cash flow. That means trouble for any of your other outgoing payments, and it also means that much of your small business’s earnings are tied up before you’ve even got them. Sure, once one debt is paid off, that’ll loosen up some money, but doing so could take a lot of time. And there’s also the drawback of having to pay interest and fees, as we already mentioned.

Many debts to pay even if they’re small ones, means that you’ve got fees and interest to cover on all of the debts, which then means that your cash flow is going to be extremely tight. These payments can quickly become unmanageable and completely cut off your incoming cash. Now, imagine if, instead of having to pay some debts at different times of the month, you could have one affordable payment at the end of each month.

With proper planning, consolidation will loosen up a lot of your cash flow. Even if your cash flow isn’t the best, you can still consolidate your business debt to cover poor cash flow. That means that your cash flow situation will ease, and you’ll be able to improve it.

Business Loan

Long-term Solution

However, this isn’t exactly a short-term solution, even though it might have some short-term benefits. By their very nature, debts require long-term solutions, and in most cases will take more time than your current financing arrangements. That does have its benefits, but it also has drawbacks, so you need to be aware of both.

The main benefit is that you’ll have more of your current income available and be able to manage repayments better than you are now. Consolidating debt generally also means that you’ll more than likely pay less interest on your small business debts than you do as they stand now. However, there is one major drawback when you need to consolidate your business debt to cover poor cash flow; you’ll be paying back your small business debts for a lot longer than your current plan, as has already been brought to your attention.

How to Consolidate Your Small Business Debts?

Exactly how do you go about consolidating your small business debt, though? Aside from a typical bank, the easiest, and the most popular is a Small Business Administration (SBA) loan. These can be for up to $5 million, and the SBA is accustomed to consolidating debt for small businesses. The vast majority of SBA loans come in at an interest rate of 6.75%, which is much lower than most lenders charge.

Though, the minimum amount of time you need to pay back an SBA loan is seven years; they’ll even extend loans for as much as 25 years. But, as we’ve stated already, consolidating a loan is a long-term solution, so you’ve got to be prepared for long-term payments. Outside of having poor cash flow, there’s no other realistic option than that.

Like any other type of loan, however, there are some catches when applying; you’re going to need a strong credit rating and some solid business financials to qualify. This is also the case with going to a bank in order to consolidate your business debt to cover cash issues. Unfortunately, getting a small business loan, even a consolidated one, comes with many hurdles like those that we point out.

There’s also the possibility of a loan through Foundation, which provides consolidated loans of up to $350,000, so if your small business debts are lower than that, they’re certainly worth exploring. However, while there mightn’t be as many strings with Foundation as others, they do charge higher interest, so you might need to examine this possibility before taking this option. These two, Foundation and SBA, are two of the ways to consolidate your business debt and avoid poor cash flow.

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Lynne Huysamen

Mommy to a pigeon pair, blogger and online marketer. Lover of chocolate, good books and buckets of coffee.

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