Managing your company’s debt can quickly become complicated. One way to simplify the process is to consolidate your business debt. However, like many other parts of entrepreneurship, this decision comes with a unique set of benefits and drawbacks. Here’s a look at some of the potential pros and cons to consider before you consolidate your business debt.
Pro: Possible lower interest rate
Consolidating your business debt is like taking out another loan — and when you take out a loan, you receive an interest rate based on your credit score. If your credit score has improved since you took out your company’s other loans, you could qualify for a better interest rate. However, a better interest rate isn’t guaranteed — you could also end up with a higher rate. On top of that, Forbes contributors Kiah Treece and Jordan Tarver warn you’ll also have to pay fees associated with taking out a loan when you consolidate your debt. These include origination fees, annual fees, balance transfer fees, and closing costs. Be sure to crunch the numbers to make sure you’re making a money-saving choice for your company’s finances.
Pro: Potential to improve your credit score
If you’re struggling to make multiple payments on time, business debt consolidation could help you build your credit score. Simplifying your payment schedule could make it easier to pay your bills on time and in full. And if you keep your lines of credit open while paying down your consolidated business debt, Bankrate contributor Mia Taylor suggests you can improve your credit utilization ratio, which can also build your credit score. However, keep in mind your credit score will take a hit after you initially apply for the loan, due to the hard inquiry credit check.
Pro: Streamline your payments
When you consolidate your company’s debt, you won’t have to keep track of multiple payment due dates. In addition to freeing you from juggling due dates, Nerdwallet author Jackie Veling explains consolidated debt may be more motivating to pay down, since it gives you a clear finish line. On the other hand, while consolidation may simplify your debt, it’s essential to keep on top of payments. Review your budget to make sure that your company can spare the money to make the new required payment. To prevent missing a critical payment, Forbes contributors Kiah Treece and Jordan Tarver suggest taking advantage of any automatic payment programs your lender provides.
Con: It may cost more in the long run
When consolidating your debt, you may find you’ll have a lower monthly payment, and possibly a lower interest rate. While this may make it sound like you’re saving money all around, that may not be the case. In order to provide you with lower monthly payments, it’s likely your consolidated loan has a longer term. Therefore, it’s possible you may ultimately pay more in interest throughout the life of your loan. To avoid this potential pitfall, Treece and Tarver suggest budgeting to make larger monthly payments, which will enable you to pay the debt down faster.
Consolidating your business debt could help you manage your finances — or it could make repayment costlier for your company. Before deciding whether or not to consolidate your debt, discuss your options with a business partner or financial advisor for advice tailored to your situation.