It is interesting to note that the same financial operation is named differently with respect to its area of application. Refinancing is a term that is commonly used in business and even for home loans. It is the method of securing a new loan, usually at better terms and rates than the prevailing loan and use the money to pay back the earlier loan. This helps to reduce the financial burden in the long run. A similar activity can also be undertaken to repay multiple loans. The new loan is then used to pay back many creditors. When this happens, the same arrangement is known as debt consolidation.
The trap of debt cycle
Debt cycle is a dreaded word in business especially for small business. It is a vicious cycle when new loans are taken to cope up with the burden of old loans. Businesses that face cash crunch and have bad credit history are most likely to get trapped in this vicious cycle. Bad credit history prevents them from availing a single large loan from traditional sources like banks and credit unions. In order to meet expenses arising of emergencies and unforeseen circumstances in business, there is no other way but to take small loans serially. This builds up the kitty of multiple loans that can weigh down heavily at some point in time. This is known as loan stacking.
Easing cash flow
When such situation is encountered by small business owners they desperately look for easy debt consolidation loans. The idea is to secure one big loan that can be used to pay back multiple debts. Managing finance for loan repayment becomes easy in the process as there is only a single lender that replaces all other lenders. When loans are repaid to multiple lenders, depending on the outstanding amounts, some repayments will happen quickly. This money can then be used to speed up some other loan repayments. Effectively it can even pave the way for better cash flow which can make the business grow.
The attraction of debt consolidation
Single window arrangement suits best for any business operation and debt consolidation just allows that facility. Instead of dealing with multiple creditors, you have to deal with just one lender. It makes managing the loan easier. Moreover, the interest rates of the new loan will be lower than the overall liability of interests that accumulate from several borrowings. The major part of the money that you get is used for principal repayment, thereby reducing the loan burden rapidly. Unless both the benefits are available, you should think twice before availing debt consolidation.
Look for debt consolidation companies that can broker a loan for you. They would be responsible for arranging loan at cheap rates and administer and manage the process on your behalf. This would include collecting payments from your business and paying off creditors systematically. Besides low interest loans that they can arrange for you, look for unsecured loans that can be availed without any collateral security. This would be like the topping on the cake.