Business debt can come in many forms such as loans, overdrafts, credit cards or cash advances. It can be difficult to keep on top of all the best rates and manage all the repayments and we often come across business owners who chose to consolidate their debts. Therefore we thought it would be useful to produce a short resume for our clients and partners.
What is consolidating debt?
Consolidating debt is combining multiple debt, whether that be various different products with different providers, or multiple loans with the same provider into one single debt.
What are the benefits of consolidating debt?
The main benefit to consolidating debt is the ease of having a single monthly repayment, a more affordable monthly repayment or a lower cost overall.
A single, lower monthly repayment
As a result of consolidating your debts, you’ll replace them with one loan, with one monthly repayment. For busy business owners, this can make it easier to manage and plan cash flow. It can also reduce the risk of missing repayments. Depending on the loan terms you choose, consolidating debt can reduce your monthly repayments. By taking your loan over a longer period of time, your repayments will go down. This can help ease your cash flow but it can lead to higher costs in the long run.
Consolidating can also help lower the cost of your debts. Particularly if you have multiple products with different providers, you may be getting charged overdraft or credit card fees, or high rates of interest. As well as simplifying your debts, an affordable business loan can reduce the combined costs of these rates and fees.
Considerations when consolidating debt
There are potential downsides to consolidating debt and it’s important to understand these so you can make the best decisions for your business. Some of the potential downsides to consolidating are:
Increased overall costs
Consolidating loans can be the more expensive option over the lifetime of the loan. For example, if you choose to consolidate all your debts into one loan, and repay over a longer period, whilst your repayment is now lower and your cash flow is easier to manage, the interest you’ll pay over the new term could mean it’ll cost more in the long run. It may still be a good move for your business, but it’s important to understand the costs involved.
When you take out a loan to consolidate your debt, there will usually be a charge to do so. The fee will depend on the provider and the type of loan you take. You should look carefully at the fees involved when deciding whether consolidation is best for your business.