Is a Debt Consolidation Loan Right for You?

There is a reason the acronym KISS has stood the test of time. When a situation feels like it’s spiraling out of control, “keep it simple, stupid” can be the first step toward sanity.

A small business owner who is constantly behind in paying bills may find it easier to manage one simple payment. Debt consolidation is not always about finding a lower interest rate. It may make sense to consolidate many short-term loans into a single long-term loan, even if the interest rate on the single loan is slightly larger than the cumulative interest of your existing loans. For starters, you may be paying penalties for late or missed payments on the existing loans.

Why Consolidation May Make Sense

Many entrepreneurs begin considering debt consolidation when their cash flow dries up. As with any business strategy, it’s best to get out in front so you are not considering loan options with a sense of desperation.

Ideally, a small business owner has strong credit and uses a debt consolidation loan to pay off several small business loans that may have been used to cover unexpected costs. A business owner with a good credit history often can get a debt consolidation loan with good terms.

Too often, business owners considering a debt consolidation loan are in a tighter spot. If one’s credit score has suffered because of missed payments, it may be difficult to obtain a consolidation loan that makes sense. It may be smarter to improve your personal and business credit scores before applying for a debt consolidation loan.

Assessing Your Options

Winnie Sun, the founding partner of a California-based financial consultant, told the personal finance website NerdWallet that small business owners should aim to have all of their debt repaid within one year of launching their company.

The primary objectives of a debt consolidation loan are to eliminate stress and save money. A good first step to determining whether debt consolidation makes sense is to take inventory of your debt.

A wise second step is to consult with experienced lawyers who have thorough knowledge of bankruptcy alternatives.

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