How small businesses can take advantage of debt consolidation

Small businesses in Nigeria and all over the world are plagued with the problem of refinancing their already existing loans. Not only this, in harsh business environments like Nigeria, many small businesses have had to take up loans in order to keep the business afloat.

This seems like a good idea in the short run but macro-economic factors like inflation, which brings about a general increase in the cost of sales for these small businesses and ultimately make it difficult for these businesses to pay their loans. This is because they are small, which means that they have very little room to transfer their cost to their customers without the risk of losing them to other alternative services or produce or to a bigger competitor who has a very well-established market share. This then affects their potential profits which would have been used to refinance their loans.

This is why in a country like Nigeria, asides from getting loans from loan sharks, who give out loans with high repayments for their customers and not to mention the recent trend of how these platforms share personal information of those who have defaulted on payments to the general public in a bid to shame them into paying back their loans, it is quite difficult to get reasonably priced loans from both banks and microfinance banks.

As a small business owner who has now taken various loans from different sources, it becomes very difficult to keep track of it all. Here in lies why debt consolidation is very important for small business owners to know.

What is Debt Consolidation?

Debt consolidation is a sensible financial strategy for small business owners who have taken on multiple debts from different sources. Consolidation merges multiple bills into a single debt that is paid off monthly through a debt management plan or consolidation loan.

Debt consolidation reduces the interest rate on your debt and lowers monthly payments. This debt-relief option untangles the mess business owners face every month trying to keep up with multiple bills and multiple deadlines from multiple card companies. In its place is a simple remedy; one payment to one source, once a month.

How it works

Debt consolidation is the process of using different forms of financing to pay off other debts and liabilities. If you are saddled with different kinds of debt, you can apply for a loan to consolidate those debts into a single liability and pay them off. Payments are then made on the new debt until it is paid off in full.

Most people apply through their bank, credit union, or credit card company for a debt consolidation loan as their first step. It’s a good place to start, especially if you have a great relationship and payment history with your institution. If you’re turned down, try exploring private mortgage companies or lenders. Creditors are also willing to do this for several reasons.

For the borrower, debt consolidation maximizes the likelihood of collecting from a debtor. These loans are usually offered by financial institutions such as banks and credit unions, but there are other specialized debt consolidation service companies that provide these services to the general public.

An important point to note is that debt consolidation loans don’t erase the original debt. Instead, they simply transfer a consumer’s loans to a different lender or type of loan. For actual debt relief or for those who don’t qualify for loans, it may be best to look into a debt settlement rather than, or in conjunction with, a debt consolidation loan.

Diving in deeper, there are two broad types of debt consolidation loans; secured and unsecured loans. While secured loans are backed by one of the borrower’s assets, such as a house or a car, unsecured loans, on the other hand, are not backed by assets and can be more difficult to obtain. Unsecured loans also tend to have higher interest rates and lower qualifying amounts. With either type of loan, interest rates are still typically lower than the rates charged on credit cards. And in most cases, the rates are fixed, so they do not vary over the repayment period.

Why this is important for you and your business

Debt consolidation is a great tool for people who have multiple debts with high-interest rates or monthly payments, especially for those who owe N10 million or more. By negotiating one of these loans, you can benefit from a single monthly payment in lieu of multiple payments, not to mention a lower interest rate.

As long as you don’t take out any additional debt, you can also look forward to becoming debt-free sooner. Going through the debt consolidation process can cut down calls or letters from collection agencies, provided the new loan is kept up to date.

However, it is important to remember that although the interest rate and monthly payment may be lower on a debt consolidation loan, its pay schedule can be another can of worms you do not want to open. This is because longer payment schedules mean paying more in the long run.

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