Poor credit management, lack of money and personal use of business funds have been fingered by the United States Small Business Administration (SBA) as the major causes of business debt and failure of companies. When a business lacks the cash to carry out basic day to day functions such as payment of rent and wages, the business can quickly degenerate and become delinquent or worst, bankrupt. In recent times however, filing for bankruptcy has been made even more difficult.
The Bankruptcy Abuse and Prevention and Consumer Protection Act have a lot of stipulations that ultimately make it more difficult for small businesses to be able to be declared as bankrupt. When you are having problems with your cash or you find out that you are sliding into debt, the solution you will pursue to curb this issue can be the difference between business resuscitation and bankruptcy.
To ensure that your business is healthy and pull through debt, it is necessary to explore the various methods that are available to business owners in order for them to effectively and efficiently control their debts. One of such methods is consolidation of debt.
Consolidation of debt simply refers to a way of paying off the debts a business had accrued during the course of its business activities without having to declare bankruptcy. Instead of managing a few high interest loans like credit cards, people can consolidate their debts using a single personal loan with lower interest rate to pay off their debt.
Table of Content
- Pros of Debt Consolidation
- Cons of Debt Consolidation
- 1. The payoff plan can leave you in a worse state if it doesn’t work out
- 2. If you are not careful, you can run into more debt
- 3. It could ruin your credit score
- Prepare your mind to tackle your debt issue
- 2. Acknowledge what got you to this point
- 3. Shop around for the best options before consolidating
- 4. Go for counselling
- 5. Research first before you dive in
- 6. Explore debt settlement
- 7. Consolidate the right debts
- 8. Choose the right professional to help you out in your debt consolidation
- 9. Don’t use your cards too soon
- 10. Make a plan to move forward
- 11. Check your credit report and scores
- 12. Ensure that the consolidation is worth it
- 13. Remember your credit scores
- 14. Choose your debt consolidation company wisely
- 15. Keep your responsibilities in mind
- 16. Balance transfer can impact your credit
- 17. Insure that a 0% APR applies only to balance transfers
- 18. Zero percent APR does not equate to free
- 19. Not all credit card counsellors have your best interest at heart
- 20. Commit to your chosen debt consolidation plan
Pros of Debt Consolidation
If you are consolidating five credit cards into one loan, it is a lot easier to keep track of it and thus it makes things a lot easier for you. Instead of writing multiple checks to various financial institutions, you will have to write just one.
2. Paying less
With debt consolidation, you will get to pay less every month. By using a personal loan to pay off high interest rate loans, you will spend less on interest payments every month and you will ultimately reduce how much you will pay in the life time of the loan.
3. You will pay off the debt faster
Due to the fact that consolidating your debt has the ability to reduce your interest rate, this implies that whenever you make your payments, they will make a dent in the debts themselves instead of being lost in the multitude of interest payments that multiple payment incurs. As a result of this, you will find out that you will be able to pay off your debt in a year or less as opposed to a couple of years that would have been the case had you not used the debt consolidation option.
4. Credit damage
Missed or late credits have the ability of doing damage to your credit score. By consolidating your debts, you will be able to prevent the disadvantages that come with them.
Cons of Debt Consolidation
1. The payoff plan can leave you in a worse state if it doesn’t work out
Once you have consolidated your debts, you will have the stick to that plan or you will risk facing stiff penalties and damage to your credit score.
2. If you are not careful, you can run into more debt
Since part of the debt consolidation process will involve freeing up some money, you will ultimately have more cash in your hand to spend. While most smart consumers will either save this cash or put it to settle other debts, there are still others who will use their extra money to get into even more debt. From here, these sets of people are able to even put themselves into a vicious cycle of debt.
3. It could ruin your credit score
Some debt consolidation companies are also debt settlement negotiators as well and some may take advantage of the fact that you are paying them a lump sum of money to hold it for longer periods thus becoming delinquent on the said debt so as to have leverage to negotiate lower settlements on the debts repayment later. This will then go on to ruin your credit history and score.
How to Consolidate Business Debt the Right Way
Prepare your mind to tackle your debt issue
Making up your mind to take a step towards consolidation is the first and most important step towards getting yourself out of debt. Simply ignoring your debts will not make them to magically go away, rather it will add financial stress to your life. The sooner you start consolidating your debt the sooner you will get out of debt.
2. Acknowledge what got you to this point
Most a times, the reason people go for debt consolidation is because they have not been able to manage the way they spend their money and are thus facing the consequences. Sometimes, the debtor grasps at straws but fails the come to terms with the issue that made him need the debt consolidation in the first place. Consolidation occurs when someone accrues a debts that is $10,000 or above.
This amount of debts doesn’t just come about overnight. They are the sum total of all the bad decisions the debtor has made. If you do not come to terms with the reason why you are in debt now, it can easily happen again. Before you even think about consolidating your debts, it is advisable to first make the necessary changes in your behavior and spending and also cut out all those additional luxuries.
3. Shop around for the best options before consolidating
There are very many ways in which debts can be consolidated such as secured and unsecured loans, transferring outstanding debts onto a new or existing line of credit or pooling your debt on a balance transfer credit card. Each of the options come with their own unique pros and cons and they will be different according to the exact circumstances you find yourself in and as such, you will have to study these options that are at your disposal to make the very best choice that will be of most benefit to your situation.
4. Go for counselling
Before embarking on a debt consolidation strategy, you can really benefit from a professional credit counselling session. Debt consolidation is not a magic wand that proffers a fix to all things and as such, there is need to go through credit counselling first. The main aim of this session is to critically asses your debt situation so as to provide you with solutions that are tailored down to your needs.
You will need to provide your financial information such as your monthly income, assets you have, credit card debts and liabilities. Credit counseling sessions are free and can be done face to face or over the phone.
5. Research first before you dive in
Debt consolidation is not offered by all banks and credit unions, therefore it is really necessary to carry out your research. You will also need to research the implication of doing business with that particular consolidation company. Often at times, online lending sites offer debt consolidation and as such may be a better place to borrow.
6. Explore debt settlement
Debt settlement is a legal way in which you can pay less than you actually owe. You can reach an agreement with your creditors to set a more reachable target payment that will satisfy them. Creditors agree to settlement because something from you is better than nothing at all. In order to settle your debts, you will need to first identify and select a debt settlement company.
This company will then be tasked with negotiating with your creditors to reduce the total amount of debts that you owe. Once in the program, you will have to pay a certain amount of money per month to the settlement company. They will hold your money until there is enough to satisfy your debts and pay off the fees.
7. Consolidate the right debts
In some cases, people fall into the trap of consolidating all their debts even those with low interest rates such as student’s loans. If you are not careful with the loans you try to consolidate, you may end up rolling low interest credit cards into the mix which will ultimately lead to paying higher interest simply for the convenience that is associated with paying a single consolidated payment.
You will be better off if you consolidate high interest debts and leave low interest debts to be paid off separately. Examples of debts that should not be consolidated include IRS debt and back taxes, lawsuits, boat loan, home loans, mortgages, recreational vehicle loan, home equity lines of credit et al.
8. Choose the right professional to help you out in your debt consolidation
The debt consolidation industry is not in any way devoid of shady characters, and firms that employ aggressive tactics. Some of these firms go as far as withholding payments from creditors for some time in order to force a deal. While this tactic may work at times, it does a very huge damage to your credit score. Also, there are other debt settlement firms that charge clients fees before obtaining results. The Federal Trade Commission has however bared such fees for any firm that contacts you by phone but fees can still be hefty.
9. Don’t use your cards too soon
With debt consolidation, there is a tendency to think that it is a perfect relief from calls from collection agencies and also the task that is involved all the many credit card bills that you may have. But at times, there is a danger that is attached to this. A common mistake that people who are in debt make is to use a newly freed up credit card to spend again.
Many people promise they will only charge the card once, but before they know it, they are back in the same spot they were in before. You will need to remind yourself that you do not have a clean slate in the sense that you still have a lot of outstanding debt to settle. A good way to avoid the temptation to use the cards again is to close them or just simply cut it up.
10. Make a plan to move forward
Even after having sought out the help of professionals in choosing the best consolidation plan, it is necessary to note that the issue is not yet totally over. You will still need to have a very concrete blueprint that will help to offset your consolidated debt. You will need to sit down with your family and with the aid of a financial planner create a detailed budget that will find an equilibrium with your income and expenses.
11. Check your credit report and scores
You should always check your credit score to know if they are accurate. This is because if there is a mistake or an over sight in your credit report, it could be detrimental to your qualification for the debt consolidation help you need. In the event you find an error, dispute it. Major credit reporting agencies like TransUnion, Equifax et al. can help you to get a free annual credit report. Once you know where your credit stands, it will enable you to have most of the information that you will need to decide what credit card debt consolidation plan that will be best suited for your situation.
12. Ensure that the consolidation is worth it
Even though the aim of credit card debt consolidation is to help you to save more money, it should be noted that this often comes at a price. Most credit cards come with a balance transfer fee and as such, it will be left up to you to ensure that the cost you are paying does not outweigh the benefits of getting a lower interest rate on your debt.
For instance, before you go for a debt consolidation loan, you should first try to know about the loans origination fees and make sure the loan payment amount is something that easily fits into the budget you have. If you default and do not pay your business loan as agreed, it will hurt your credit.
13. Remember your credit scores
Depending on the debt consolidation option that you choose, it can affect your credit in a lot of ways. For instance, if you are consolidating multiple balances into one card, you will want to avoid maxing out the card credits limit. This is because it will definitely hurt your credit utilization rate.
14. Choose your debt consolidation company wisely
Choosing the right consolidation company can be the beginning of your departure from debt or your worst nightmare. When you are trying you make a choice of a debt consolidation company, you should not just focus on the organization’s success and popularity. You should ensure that the company is reliable, trustworthy and capable of handling your problem well. Don’t just rely on what the adverts of the company say to tip you over, instead check reviews of people who have used their services and ask friends and family members what they know about the company.
15. Keep your responsibilities in mind
Debt consolidation can be the answer to your debt issues if you realize the responsibilities you have to fulfill from your own end. Such responsibilities includes monitoring, copying and then forwarding your monthly account statement to your agency of choice every 3 months, habitually submitting every financial statement to your agency so that reports will be accurate and also letting your agency know if you are still being harassed by your creditor.
16. Balance transfer can impact your credit
Consolidating your credit cards and leveraging low balance transfer offers have the potential to increase your credit score if you play your cards right. For instance, generally 30 percent of the FICO credit score is determined by the amount of credit that is actually used. You should also try to make sure that your credit card balance is always low. When you take the consolidation route, the cards that you are consolidating will have much lower credit utilization ratios, but your overall ratio will remain the same.
17. Insure that a 0% APR applies only to balance transfers
An introductory APR of zero percent might only apply to balance transfer. Due to this fact, new purchases can be charged the standard APR which can be quite high. Your cardholder agreement will state the APR for purchase and whether any intro rate will apply.
18. Zero percent APR does not equate to free
Even though a zero percent intro APR will help you to offset your credit card debt faster and will also save you interest on payment, it is far from being free of charge. Fees such as balance transfer fee apply and they can range from 2 to 5 percent of each balance that was transferred. However, it should be noted that even with the upfront cost, this is a cheaper option in the long term.
19. Not all credit card counsellors have your best interest at heart
Seeking for the help of a counsellor in other to help you tackle your debts is a laudable move, but you should thoroughly evaluate the counselors at your disposal before you make a final choice. Even though they are termed “Non-profit” it does not exclude the fact that they may be illegitimate or may charge you some money. Surprisingly enough, some non-profit credit counselling organizations have been known to charge exorbitant fees. Always choose the most reputable, trusted and reliable credit counselor at your disposal.
20. Commit to your chosen debt consolidation plan
Irrespective of the debt consolidation plan you choose, it is really important for you to stick to it in order for that strategy to give you the outcome that you desire. You should always go through your credit reports from time to time so as to be kept abreast of how your credit is being affected by your debt consolidation plan.
In conclusion, you should bear in mind that the process of starting a business debt consolidation and getting debt free will take some time. Getting into debt does not happen overnight and as such, getting out of it will still take time. Also you should be aware that business debt consolidation is not without risks. For example turning an unsecured debt into a secured debt is not usually the best option therefore, it is better to avoid utilizing home equity and to not refinance a mortgage to pay off a debt.