How small businesses can benefit from debt consolidation

Small businesses in Nigeria and around the world are plagued with the problem of refinancing their existing loans. Not only that, in tough business environments like Nigeria, many small businesses have had to borrow to keep the business afloat.

This might seem like a good idea in the short term, but macroeconomic factors like inflation are leading to an overall increase in the cost of sales for these small businesses, ultimately making it harder for these businesses to pay their loans. This is because they are small, meaning they have very little room to maneuver to pass their costs on to their customers without risk of losing them to other alternative services or products, or to a larger competitor that does a lot well-established market share. This then impacts their potential profits that would have been used to refinance their loans.

This is why in a country like Nigeria, apart from getting loans from loan sharks who make large repayment loans for their customers, not to mention the recent trend in how these platforms share people’s personal information, who have defaulted on payments In order to get them to repay their loans, it is quite difficult to get loans at reasonable rates from both banks and microfinance banks.

As a small business owner who has meanwhile taken out various loans from various sources, it becomes very difficult to keep track of things. Here lies why debt consolidation is very important for small business owners.

What is Debt Consolidation?

Debt consolidation is a sensible financial strategy for small business owners who have incurred multiple debts from different sources. Consolidation combines 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 each month trying to keep up with multiple bills and multiple deadlines from multiple card companies. In its place, there is a simple cure; a payment to a source, once a month.

How it works

Debt consolidation is the process of using various forms of financing to pay off other debts and liabilities. If you are burdened with different types of debt, you can apply for a loan to consolidate that debt into a single liability and pay it off. Payments are then made on the new debt until it is fully paid off.

Most people apply for a debt consolidation loan through their bank, credit union, or credit card company as a first step. This is a good place to start, especially if you have an excellent relationship and payment history with your institution. If you get rejected, try exploring private mortgage companies or lenders. Creditors are also willing to do this for a number of 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 offer these services to the general public.

An important point is that debt consolidation loans do not erase the original debt. Instead, they simply transfer a consumer’s credit to another lender or type of credit. For actual debt relief or for those who do not qualify for credit, it may be best to consider debt settlement instead of or in conjunction with a debt consolidation loan.

Dig deeper, there are two broad types of debt consolidation loans; secured and unsecured loans. While secured loans are secured by the borrower’s assets, such as a home or car, unsecured loans are not secured by any assets and can be more difficult to obtain. Unsecured loans also typically have higher interest rates and lower qualifying amounts. With both types of loans, the interest rates are usually still lower than the interest rates charged on credit cards. And in most cases, the rates are fixed so they don’t change during the repayment period.

Why this is important to you and your business

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

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

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

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