Running a business, especially in the startup period, isn’t easy, nor is it inexpensive. As you build your business, you can expect to rack up a number of expenses, including marketing and advertising, partnerships, materials, labor, and more. And with multiple bills and debt sources come stress.
If you have a number of outstanding debts that need to be paid, then a debt consolidation loan may be a good route for you and your business.
Here are the pros and cons of a debt consolidation loan.
Pros of a Debt Consolidation Loan
A debt consolidation loan is one of many different types of business loans in which a number of outstanding debts and consolidated into one fixed payment plan. The obvious benefit of a debt consolidation loan is the simplification: instead of having to worry about multiple payments each month, whether or not you have the cash to cover them, the various due dates, and more, you only have to worry about one singular payment. This also helps to save time, and, in some cases, money as well.
In addition, a debt consolidation loan can help you conserve precious cash flow. When you are juggling multiple different loans and payments, it can be tough to maintain steady, predictable cash flow.
According to Max Funding, “as a business owner with consistent overheads, invoices, wages and other business expenses, an overdraft account allows you to meet your daily cash flow needs by giving you the option of redrawing credit up to the approved limit at any time.”
A business consolidation loan can help to bring some balance back to your business and conserve cash flow. Most debt consolidation loans offer the advantage of a lower interest rate over a longer term, which gives you more breathing room to get your feet back under you, financially, and find a balance.
Cons of a Debt Consolidation Loan
While debt consolidation loans can be incredibly helpful to businesses, there also are a number of drawbacks of using them.
For example, when you consolidate your business debt, you are susceptible to paying interest on top of interest, which is an added cost. When you take out a debt consolidation loan, you are consolidating all existing debt, which includes the existing interest on those payment plans, and then adding on top of it the interest that comes with the debt consolidation loan.
This means that the interest that you’ll pay on your debt consolidation loan will compound on the initial interest you owed. So even though your interest rate through your debt consolidation loan might be lower, you will likely still end up paying interest on top of interest.
One of the reasons that debt consolidation loans are so appealing is that they regulate your payments and make them smaller over a longer period of time. While this is initially favorable, what it really means is that you might pay more in interest over the life of the loan, even though the interest rate is lower. Therefore, the total cost of the long-term loan can be more than the individual loans that you were paying initially.
As you can see, there are both pros and cons to using a debt consolidation loan. It provides an immediate short term benefit by way of organization and simplification, but the long-term impact might be more than you realize. Do your research before moving forward with a business debt consolidation loan.