As a business, it’s quite normal to have a balance sheet that comprises of some debt. Whether that debt is in the form of a loan, credit cards, line of credit, or some other type of debt, it’s important to stay on top of your financial obligations. If the amount of debt your organization has is currently overwhelming, debt consolidation may be a smart option for getting all of your debt in one place.
What is Debt Consolidation?
To those unfamiliar with the term, debt consolidation, as outlined by the Consumer Financial Protection Bureau, refers to the practice of combining various forms of debt into one monthly payment that comes with a single interest rate. While debt consolidation does not erase the bottom-line total debt your company has, it does consolidate it into one location which can simplify the repayment process.
Oftentimes, as an organization begins to grow, they take on various forms of financing. They may partner with a bank to garner a line of credit for general business purposes, as well as take out corporate credit cards for their employees to use for business purposes. After this, the company may take out an equipment finance loan in order to purchase certain pieces of equipment for day-to-day operations.
Each of these types of debt will come with its own payment and its own interest rate. As a company continues to grow and the debt types they have grows with them, it can be challenging to keep all your monthly payments and interest rates in order. Debt consolidation allows you to combine all sources of debt into a single payment and interest rate.
Benefits of Debt Consolidation
There are a number of primary benefits to business debt consolidation that all organizations should consider. While debt consolidation may not be the right path for every organization, the following benefits certainly make it a viable option:
- Your organization’s finances can be streamlined under one location
- You will only be responsible for keeping track of a single interest rate that is possible lower than what you were paying
- You may be able to reduce your monthly payment
- You could pay off your debt faster than you would have before
Drawbacks of Debt Consolidation
While the above benefits certainly make debt consolidation something to consider, there are a few drawbacks to consolidating your debt that you should keep in mind:
- There may be hidden fees associated with the consolidated debt
- You may pay more in interest over time than you would have with separate loans
- The overall amount of debt you need to pay doesn’t change
- Consolidating your debt may cause you to falsely believe you have additional funds to spend
3 Ways to Consolidate Business Debt
Assuming you have evaluated the pros and cons to debt consolidation and decided that it is an option for your business, you will likely be wondering how debt can actually be consolidated There are three primary ways in which a business can consolidate the debt they have:
- Balance transfer credit card
For organization’s looking to consolidate credit card debt, a balance transfer card may be an option. A balance transfer credit card will work best for smaller organizations and works quite simply. These types of credit cards feature and introductory APR of 0%, typically for 12-24 months on average, and allow you to transfer balances from other credit cards to the new card.
This means any outstanding debt you have with other credit card companies can be transferred to the new card. By utilizing the 0% APR introductory period, you can make major paydowns to the debt you have accumulated without having to worry about any interest. Be aware that once the introductory period ends, however, you will be responsible for a standard, sometimes higher, APR once again.
- Debt consolidation loan
For an organization that has a loan or line of credit outstanding with a large amount of debt, taking out a debt consolidation loan is an excellent choice. This type of loan, which is usually a personal loan, offers enough funds to meet the payments on your outstanding debt. Once those other debt components have been paid off, you will only owe the outstanding loan balance from the company you consolidated debt with.
- Use a home equity loan
Finally, especially for small businesses, taking out a home equity loan can work in certain circumstances. This type of loan allows a borrower to take out funds based on the amount of equity they have in their home. With loan amounts going up to 50%-75% of the equity in your home, a borrower can gain access to hundreds of thousands of dollars. For small business owners, this can be an excellent way to pay off other forms of debt and consolidate. However, your home is the collateral with a home equity loan, which is a serious risk if you are unsure you can pay back the loan.
Alternatives to Business Debt Consolidation
In some cases, debt consolidation may not be the right choice for your business. There are a number of alternatives to consider if you believe this is the path for you:
- Debt settlement: In some cases, you can negotiate with your creditors to delay payments or adjust terms of your debt until you are able to make payments on that debt. Reach out to your lenders to see if debt settlement or forgiveness is an option.
- Adjust your budget: At the end of the day, making a few tweaks to your budget may be all you need to do in order to make payments on your debt.
- Bankruptcy: In a worst case scenario, declaring bankruptcy may be the best course of action for your organization.
Improve your organization’s financial standing
Whether debt consolidation is right for your organization or not, all that matters is that you stay on top of the financial obligations your company has. Pay any bills on time and in full to ensure you remain in compliance with any regulations your lenders put in place. On top of this, consider whether or not the debt your organization has is really meaningful or if it is simply taking up room on your balance sheet.