Individuals and businesses get into debts in life at some point or other. Taking debt from the market is nothing uncommon, but the problem arises when we fail to repay. In the case of businesses, finance is essential for the smooth flow of operations. It is considered as the backbone of a concern. Debts are taken from the market by business houses for several reasons. For some businesses it is to finance their working capital requirements, i.e., the day to day operations, for some it is to purchase new assets and equipment, while for others it is for inventories management. In this post, you will get in-depth information about the problems of having multiple debts and the slight variation between the concept of refinancing and debt consolidation.
Operational Mismanagement Requiring Procurement of Multiple Debts
Some of the classic mistakes resulting in the requirement to avail credit include Overestimated Revenue Forecasts, i.e., actual Sales much lower than predictions, Excessive Expenditure on Overheads, Capital expenditure beyond capacity, etc.
Following are some of the problems faced by a business due to unplanned credit procurement:
- Imbalance in Cash Flows, i.e., day to day operational funds and assets. This is the essential part of any Small or Medium business as it accounts for the majority of the business proportion.
- High Interest amounts to be paid due to delay in payment.
- Frequent calls and notices for repayment of loan installments as per various schedules.
- Poor impact on credit score.
To solve these problems, there’s a systematic process called Refinancing. For best refinancing services you can access Nationaldebtreliefprograms.com/.
Understanding Refinancing and Debt Consolidation
Refinancing is a planned repayment of existing loans with the help of new loans. Although this sounds undesirable for any financial body to provide a loan to pay off another loan, that’s not how this process works. Many financial companies provide Refinancing services wherein the existing high-interest rate loans are paid off with new low-interest loans, which ultimately benefit the client with savings on the excessive interest rates.
Debt consolidation is a subtype of Refinancing, but both these terms are quite distinct in the manner of settlement of the original loans. While Refinancing involves settling original loan with a new loan, debt consolidation involves consolidation of several business loans that are smaller in amount into one big consolidated loan which has a measurable rate of interest.
Why is Debt Consolidation the Best Refinancing Alternative for Your Business?
While Refinancing promises to reduce your overall high-interest rates payments, debt consolidation doesn’t necessarily guarantee the same. Rather it solves other significant issues related to sound management of multiple debts. Therefore, these two terms cannot be used interchangeably. The problems faced by an organization having multiple debts include:
- Keeping track of multiple lender accounts.
- Budgeting for different installments of Debt repayments.
- Complexity in calculating the accumulated rate of interest on all the installments to assess its ultimate impact on cash flows.
- Regular impact on working capital due to frequent payments.
- Difficulty in obtaining new business credit accounts due to poor credit score.
Debt consolidation is a more viable type of refinancing because it narrows down your multiple numbers of debts to one. Thus, not only does it eliminate the need to pay multiple installments frequently, but it also brings the number of lenders down to one, and it may also help you to probably get a favorable rate of interest lower than the existing ones.
Types of Debt Consolidation for you to choose from
There are mainly two types of Debt consolidation which you can choose from to manage your multiple debt crises, namely Secured Debt Consolidation &Unsecured Debt Consolidation.
- Secured Debt Consolidation: As the name suggests, all your multiple debts, in most of the cases unsecured, are consolidated into one single loan which is secured against some collateral security of yours. A prominent and most relevant example of this is a Home Equity Loan. A Home Equity Loan is available at all the financial institutions and banks as a credit against your House as collateral security. Similarly, in case of a business, all your existing loans will be consolidated in a single loan against some business property as the collateral security. The term of such loans is quite long stretching up to as long as ten years or more. The monthly installments are very low and reasonable. The fixed interest rate too might be lower than the aggregate of what you are currently paying. Plus, due to the option of security, it is safer than unsecured consolidation. The only problem with such debts is the gruesome complex procedure and the paperwork of the collateral security involved, which might be a discouraging factor.
Such type of consolidation, however, can also be risky at the same time, because non-payment of dues shall result in confiscation of the business property which is mortgaged as collateral security. Moreover, what could be worse for your business is that in case the value of mortgaged property diminishes below the consolidated debt repayment value, it can pose a potential threat of bankruptcy for your business.
- Unsecured Debt Consolidation: Under this type of Debt consolidation, there’s no requirement of any collateral security to be mortgaged with the bank, and neither is there any troublesome paperwork or procedure involved in the procurement of such loans. Unsecured consolidated debts are easily available at all the banks and through market lenders by online or offline means. The only drawback is that the rate of interest is exorbitantly high as compared to the aggregate rate of interest what you are currently paying.
A debt crisis can be solved with various structural solutions and refinancing is one of them. Refinancing is basically taking a new loan with a lower rate of interest to pay an existing loan with a higher rate of interest. Although Debt consolidation is a subtype of Refinancing, it is significantly different than basic refinancing process. It involves consolidation of multiple business loans into one to solve several debt management problems.
Hopefully, you have now become familiar with the two types of debt consolidation loans. For more information on consolidation loans, you can check out our other blogs!