A single loan such as a debt consolidation loan can be used to pay off your credit card, as well as amounts you have borrowed from other lenders. Basically, it involves taking out a new loan and using it to pay off your existing debts.
How does a business loan work as a debt consolidation loan?
If you need a detailed explanation of what debt consolidation is and the steps to prepare for a loan of this type, read this. Guía completa sobre préstamos de consolidación de deuda.
You can also take out a business loan (as opposed to a personal loan) and use it to pay off the rest of your business debts. Why should you borrow from a financial institution that offers business loans and use the funds to pay off your other lenders? Because it can provide you with several advantages:
What are the advantages of using a business loan as a business debt consolidation loan?
If you do your research carefully and find the right commercial lender to obtain a debt consolidation loan, you could gain many advantages:
Convenience – All of your business loans are converted into one business loan. Instead of making multiple payments each month, you will need to make a single payment. This can leave you more time to focus on your business. Also, you are less likely to forget to make a payment.
You can reduce the amount to be paid each month: you can opt for a longer repayment period. Imagine a situation where your existing loans last between two and four years. You can take out a debt consolidation loan with a repayment period of five years. By doing so, your monthly payment will be spread over a longer period of time and will be significantly less.
You can lower your interest rate: Your debt consolidation loan may have a lower interest rate than the rate of your existing loans. However, remember that a reduction in your interest rate does not necessarily mean that you will pay less in interest (that is, the total amount of interest over the life of the loan). If the repayment period of your new debt consolidation loan is longer than that of your previous loans, it is possible that the total amount that you get to pay in interest will increase.
It allows you to have more cash: One of the main advantages that debt consolidation offers is that it makes you have more cash on hand for your company. If your new loan carries a lower interest rate or a longer repayment period, you could save hundreds of dollars each month.
Now, let's examine whether debt consolidation is a good idea for all entrepreneurs.
Do you want your monthly payment to be reduced? This is entirely possible if you decide to consolidate your debt. However, don’t forget that a lower monthly payment could mean you end up paying more interest for the entire duration of the loan.
Would you rather deal with a single bank rather than several? Convenience is one of the biggest advantages that a debt consolidation loan offers. It’s much easier to keep track of your repayment responsibilities if you deal with only one lender.
If you are convinced that you should apply for a debt consolidation loan, you should start looking for one as soon as possible. You have a good chance that your loan application will be approved if your business has been in business for more than a year and you have a good credit score.
What is the difference between a commercial debt consolidation loan and refinancing?
Is not the same? After all, debt consolidation involves repaying the money you previously borrowed through a new loan, and refinancing has the same goal.
However, there is a key difference:
Debt consolidation involves paying off multiple loans with a single new loan. On the other hand, when you refinance your debt, you pay off an existing loan with a new loan with a lower interest rate. Keep in mind that consolidating your debt does not necessarily always provide you with a lower interest rate.
Choosing the right bank is vital
The success you have consolidating your debt will depend largely on the bank you select.
Do you have multiple loans with a high interest rate
Consolidating your debt can allow you to reduce the cost of loans
Have you ever forgotten to make a monthly payment?
The last thing you want is to have to pay interest for late payments because you forgot the payment date. If you take out a debt consolidation loan, you will only have to remember one date a month.