Thinking About Debt Consolidation for Your Business? Here’s What You Need to KnowJan 8, 2016 Blog Entrepreneur , RainFin , SME
Debt can be good for a business. There are times when borrowing money to buy equipment, hiring a new staff member or taking out a bridging loan can be an important step towards seeing significant business growth. But business’s can just as easily find themselves struggling to keep up with repayments.
Taking control of your business’s debt can be an overwhelming task – but with the proper information and approach, debt consolidation could save you a lot of money.
So, thinking about debt consolidation for your business? Here’s what you need to know.
1. Organise your debt
The first step to properly managing your debt is by organizing it. This will not only help you feel more in control but is a great way of identifying what your most pressing debts are.
Start by bringing together all of your credit, loan and bill statements. Then review each debt. Are there some which do not need to be paid off right now? You might not need to consolidate all of your business’s debt. Categorize your debts into which are the most important to deal with at the moment.
2. Do your research
There are a lot of different ways in which you could choose to consolidate your loan – but many can trap you into a cycle whereby you end up taking more debt over time.
Say, for example you are considering using your home loan to consolidate your debt. Home loans often offer the best interest rates available. However, the reason you are repaying less interest each month is because that debt is stretched out over a much longer time – in the long run you are paying more interest on that debt.
Remember that interest compounds. So, when you are paying back your loan you are not only paying back the money you borrowed, plus interest – you are paying back the money you borrowed, plus interest on your interest.
So, if you borrowed a small amount – say R10000 at a 20% interest rate, compounded monthly:
Month 1: 10000
Month 2: 10000 + 20% Interest= R12000
Month 3: 10000 + 20% Interest(+20% Interest) = R12200
And so on.
For debt consolidation, an amortised loan (like a RainFin loan) is your best bet.
Amortised loans require a fixed amount each month to pay off your debt. Each month you pay less money on the interest of your loan, and more off of the principal loan amount. Unlike the loan demonstrated above, the amount you owe does not grow – but your loan balance does decrease.
3. Make a repayment plan
One of the reasons you may be interested in taking out a debt consolidation loan is to make the month-by-month pinch of interest a little less. But if you do not have a plan for making your repayments, you could fall foul of debt again.
When you begin repaying a consolidated loan at a smaller interest rate, you may feel as though you have more money each month. In a sense, you do. You are paying back less interest. But in real terms, you are still bearing the burden of your debt.
If your business begins to do well and reaps the rewards of the money you have borrowed to invest in it – make paying back your loan a priority. If you have chosen a debt consolidation loan wisely there will be no early repayment fee, and you can pay back as much as you like each month. Plan for increasing the amount you repay as your situation improves. That way you can leave the debt cycle as soon as possible.
Taking on debt can be a necessary part of growing a business – but keeping on top of that debt is also vital for ensuring your long term financial security.
RainFin is the ideal borrowing platform for a small business’s needs. We offer repayment terms of 12, 24, 36 and 48 months and there are no early repayment fees. Plus, the money could be in your account by the next day.
Borrow wisely. Use RainFin. The smartest way to borrow and lend money.