Starting your business

Debt Consolidation For Businesses: The Biggest Myths

By: Kate Samano January 6, 2021

Debt consolidation is a common practice for individuals as well as businesses to optimize their liabilities. Most often, business debt consolidation and personal debt consolidation work the same way. For businesses, this is a common practice that refers to an act of taking a new loan with the purpose of paying off other liabilities.

In the case of proper budgeting, this method may be one of the most optimal business debt solutions. But before applying for debt consolidation for businesses, one should take into account the size of it. For instance, if your outstanding loans are $40,000 and the bank offers you $30,000, is it better to consolidate debt? You may want to look for alternatives to get as much money as you need to cover outstanding balances.

Debt consolidation for businesses is an essential method to decrease the liabilities on their financial statements. However, there is a lot of debate on whether or not debt consolidation is an optimal business debt solution. If you are new to business debt consolidation, you may want to take a look at several platforms such as Lendzi, which can provide you with all the necessary debt consolidation facts. Now, let’s go deep into this topic and see what the most common debt consolidation myths you will see throughout your research are.

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Myth 1: Debt Consolidation hurts your credit score

Let’s not forget what the two most important factors in the calculation of credit score are: credit utilization and payment history. This means it takes into consideration how much credit you still have versus how much you still owe.

That said, there is a slight truth in this debt consolidation myth. Essentially, your credit score may slightly go down as you will have more debt and more repayments to make. But as time goes by, and you make more repayments on time, your score will go up again.

The drop in the early stages should not bother you that much as the whole purpose of debt consolidation is paying off your outstanding balances. It means you are less likely to take a new loan if the outstanding amounts are not yet paid.

Myth 2: Debt consolidation is better than bankruptcy

Debt consolidation vs bankruptcy, which is better? Many business people think about this issue when seeing their liabilities going up and returning down. The truth is, there is no right answer, but the common perception of debt consolidation being always better than bankruptcy is certainly not true!

Business debt consolidation can be an excellent option to ease the path to financial stability. If your business fell into debt for a specific reason, such as emergency costs, debt consolidation for companies is a great option to pay off the outstanding amount. However, if it is due to poor asset and liability management, then debt consolidation will not help you either as your liabilities will grow over time.

So, it would be better to budget future cash flows before getting into debt accurately. Bankruptcy plan can be better if you don’t expect to get out of debt even with debt consolidation for business. Undoubtedly, the dilemma is challenging, so you may want to contact a business consultant to make sure you are making the right choice.

Myth 3: Debt consolidation and debt management plans are the same

Debt consolidation and debt management plans share many similarities but have key differences as well. Debt consolidation for businesses allows you to take a loan and manage it all by yourself, paying off your loans. In the case of debt management solutions, things do not work that way.

There is no loan involved at all. Instead, you need to make payments to a credit counseling agency that will distribute funds to the banks and credit unions for you. It is beneficial in a way that those agencies usually have agreements with credit unions and banks to lower the interest and help you get out of debt quicker.

Myth 4: Debt consolidation loan will save you money

Essentially, debt consolidation for businesses is a way to decrease liabilities and increase assets, which will save money. However, let’s see the different types of debt consolidation strategies you may want to consider. First of all, there is a straight debt consolidation option you may get from a bank or credit organization. Another way is through home equity loans, which require your dwelling as collateral and charge you a lower percentage.

In these ways, a credit score is going to play a prominent role when deciding the annual percentage rate you will get on your loan. On the other hand, if you have a lot of current liabilities, the bank will view this as a risk and charge a higher percentage on your loan. So, you will be less likely to save money in this case. However, a debt management strategy may be a better option if the interest rate on a debt consolidation account is more than you were previously paying on your credit card bills.

Myth 5: Debt consolidation is guaranteed to get you out of debt

Debt consolidation may be a reliable way to get you out of debt. However, if you have a considerable amount of outstanding loans, the financial institution may not cover the whole amount and only provide you with some portion of it.

There is a chance that the bank can provide the whole amount as well if you have a high credit score and lower outstanding balances. But the general saying of debt consolidation as a primary way to get you out of debt is false! Admittedly, it will make your loan repayments much more comfortable and reduce your liability over time. However, this will only be optimal in case you properly budget your finances.

Wrapping up

All in all, business debt consolidation is an excellent way to minimize liabilities by covering them with a single loan. From many different ways of consolidating debt, and the best one relies on factors such as the company’s maturity and needs. Before applying for debt consolidation for businesses, one should consider and review all strategies and solutions to ensure that it is the right way to optimize liabilities..

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