How to Recover Your Small Business from Cash Debt?

About two-thirds of companies survive two years in business, half of all will survive five years, and only one-third will survive a decade. According to research, a staggering 82% of companies that fail, do so because of cash flow problems. Cash flow doesn’t just mean the amount of money that is coming in and out – we have to take timing into account, too. If you operate a business based on an invoicing system, for instance, and your invoices aren’t paid until after your loan payments are due, you might end up with a cash flow problem.

For most entrepreneurs, cash flow problems are unavoidable. Luckily, numerous options exist for recovering your small business from cash debt. Read on to learn about two of them.

The difference between refinancing and consolidation

Although people use “refinancing” and “debt consolidation” interchangeably, while similar, these two aren’t the same thing. To refinance a debt means to take out a new loan, at a lower interest rate, to pay off existing, high-interest debt. To consolidate a loan, on the other hand, means to bundle two or more loans together, taking a new loan to pay off all existing ones.

While debt consolidation is a form of refinancing, not all refinancing is debt consolidation. When you replace one debt with a new one at a lower interest rate, that’s refinancing. Debt consolidation converts multiple debts into one.

Not all debt consolidations result in a lower interest rate. While it can save you money, debt consolidation is more about making payments manageable by replacing multiple lenders with a single one.

Is this the option for you?

Business debt consolidation can be of help, but before proceeding, it is crucial that you explore it completely and see if all conditions are met for it to be a cost-saving, instead of an expensive, choice.

You need to extend your short-term loans. In the case you have multiple short-term loans which you need more time to pay off, consolidation can help to create one, multi-year term loan, or at least one with longer terms.

You got multiple, high-interest debts – if your existing loans have a low-interest rate, debt consolidation may not be a favorable option for you. The bigger your interest rates are on your current debts, the more beneficial will loan consolidation be.

Other beneficial factors include:

  • Having a solid personal credit, which lenders appreciate and can get you a lower interest rate.
  • That your business and personal finances have improved, whether through increased revenue or personal income.
  • And that your business has passed its first-year threshold.

How to

To consolidate, you will need to understand what type of debt you’re consolidating, and what its terms will be. Depending on the amount you need and what your existing terms are, different consolidation options can be used.

For loans up to $100,000, and if your personal credit score is of a lower rating, using unsecured business loans may be your best option. You can apply online and usually get access to funds on the same day. The application process is fast and simple.

For a larger amount, SBA loans are the best option. Most popular ones go up to $5 million. But they carry a lot of paperwork, need bigger approval, and take a lot of time.

Pros and cons

If you’re sure that debt consolidation is the right thing for you, then the next thing to do is to consider its advantages and flaws. Loan consolidation is a great choice, albeit a risky one.

Debt consolidation conserves cash flow. When you’re in a situation where you’re juggling multiple goals, loan consolidation can bring back some equilibrium into your company’s finances, and help you conserve cash flow. It can also tidy up your repayments, as it creates one monthly payment to one creditor that you have a deal with.

On the other hand, debt consolidation makes you pay interest on interest. If you consolidate debt, you will be paying down what you owe on your initial debt – principal and interest. Then the interest in your business debt consolidation loan will compound on the initial interest you owed. As most business debt consolidation loans are long-term, you’ll also be paying interest over a longer period of time, which means paying even more interest, even though the interest rate is lower.

Although debt consolidation is efficient for paying off smaller debts and consolidating yourself mentally and financially, everything should be researched first. Be sure to weigh all the cons and pros.

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