Key Takeaway Table
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Debt Consolidation Definition
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Debt consolidation is when you take out a loan to cover multiple other loans. This process allows business owners to combine all debts so they only need to pay one loan.
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Why Businesses Need Debt Consolidation
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Debt consolidation is essential for businesses that are struggling under the weight of several high-interest loans. Multiple debts will have different repayment schedules and amounts, which can negatively impact the way an owner runs their business. With debt consolidation, business owners can simplify their finances. They can get better terms so they can free up cash flow for important expenses like working capital.
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Ways to Consolidate Debt
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There are several loan solutions business owners can obtain to help consolidate their debts. Refinancing is one of the most common solutions. Owners can also take a second mortgage on business property, or get financing against the equity of their business equipment. Tax debt can also be paid out as part of a debt consolidation loan.
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Tips for Business Debt Consolidation
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Understand how much you need to borrow to consolidate your debts. Check your business credit score and understand your capacity to make repayments. Business owners should then carefully compare lenders and their different terms.
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Many business owners can face significant challenges while operating their businesses. These challenges can make them take on loans and other debts to help keep the business running. However, there’s a chance that applying for so many short-term loans can catch up to a business. After providing temporary financial relief, these debts can pile up and cause a huge strain on a business’s cash flow once it’s time to make high-interest repayments.
The most common reasons behind small business insolvency in Australia are inadequate cash flow and high cash use. To help prevent this from happening, business owners can combine all their smaller debts and pay them off entirely with a debt consolidation solution.
What is Debt Consolidation?
Debt consolidation is the act of taking a new loan with a lower interest rate and more favourable terms to pay out all smaller outstanding debts. Often the multiple debts to pay out include high-interest loans, short-term loans, potential lines of credit, tax debt, and more. These debts will almost always have different repayment amounts and due dates, which can mess up a business’s cash flow and make planning difficult. Debt consolidation rolls all of these together. This way, businesses are left with one loan with one repayment which simplifies budgeting and improves cash flow.
Why Should You Consolidate Debt?
Avoid Defaults
For businesses struggling to keep up with debt payments, consolidation can help prevent defaults, late payments, and the potential for more severe financial consequences like insolvency.
Simplified Finances
Consolidating multiple debts into a single loan simplifies financial management. Instead of tracking and paying multiple bills with different interest rates and due dates, you have one payment to manage, reducing the likelihood of missed or late payments.
Potential for Lower Interest Rates
The consolidated loan should typically have a lower interest rate compared to the original debts. Lower rates and better terms can lead to significant cost savings over time.
Fixed Payment Schedule
Many debt consolidation loans offer fixed repayment schedules, which can make budgeting easier. Knowing the exact payment amount each month can help businesses plan their finances more effectively.
Improved Cash Flow
By securing a lower interest rate and potentially extending the repayment period, businesses can reduce their monthly debt payments. This improvement in cash flow can free up funds for working capital, investments, or business expansion.
Improve Credit Score
Consistent, on-time payments will improve a credit score compared to multiple late or missed payments.
Peace of Mind
Having multiple high-interest debts can strain a business’ finances, but it can also negatively affect a business owner’s well-being, especially with repeated contact from lenders chasing late payments and direct debit dishonours. Debt consolidation can relieve that financial pressure for business owners and help them simplify their finances.
Ways to Consolidate Debt
There are various ways you can consolidate debt as a business owner. The goal is to gain capital to pay off debts using different loan products, such as:
Business Loan Refinancing
One of the most common ways to finance debt consolidation is through business loan refinancing. Business owners can take an existing business loan and pay it off with a different loan with more favourable terms. Ideally, the new loan should have a higher principal, lower interest rates, and longer terms. With this new loan, you can consolidate your original loan with all your other debts and pay them off in one go.
Business Second Mortgage
Another way to gain capital for debt consolidation is through a second mortgage over property. Provided there is sufficient equity a second mortgage can raise substantial funds and has the option for capitalised interest to assist cash flow.
Tax Debt Consolidation Loans
Some lenders have policies that allow for loans to pay out tax. You can use this type of loan to pay out just tax debts or combine them with other types of debt.
Equipment Financing
A capital raise is a sub-type of equipment financing where you sell your equipment to raise capital and then immediately lease it back. You’ll get the capital you need to consolidate your debts while remaining in control of your equipment.
Case Study: A metals business was having cash flow issues due to an overextension of smaller high-interest loans. Using their unencumbered equipment they were able to qualify for a capital raise to pay out their other debts. This reduced their multiple monthly repayments into one smaller repayment, greatly improving cash flow.
Tips for Business Debt Consolidation
Consolidating debt is a strong financial move that can help borrowers ease cash flow and the challenges of multiple payments on different schedules. Here are some useful tips for an effective debt consolidation process you can follow:
- Assess All Current Debts: Compile a list of all current debts, including details like lenders, interest rates, balances, and monthly repayments. This will give you a clear picture of how much capital you need to cover everything.
- Check Your Credit Score: Your business credit score can significantly impact the terms and interest rates you qualify for on a consolidation loan. Knowing your score ahead of time can help you gauge the feasibility of consolidation options.
- Check Your Capacity To Make Repayments: Check your business cash flow and determine how much you can allocate to repayments. This way, you can choose a loan solution that fits within your capacity.
- Avoid Accumulating New Debt: Once you’ve consolidated your existing debts, avoid the temptation to take on new debt, especially high-interest short-term loans.
- Consider Working with a Professional: A financial advisor or loan expert can offer guidance tailored to your business's unique needs and financial situation.
Find Loan Solutions for Debt Consolidation
Consolidating brings much-needed financial relief to businesses struggling through debt. If you’re in a situation where your business is weighed down by high-interest repayments, you should consider loan solutions to help you out. Loan experts can help you find the best debt consolidation solutions, from tailored loans to refinancing. Talk to us to find out more.
