Pros and cons of business consolidation loans

There are pros and cons to obtaining a business consolidation loan:

Pros

• Payments are more manageable

• If a business has numerous payments, due dates and interest rates to handle, then debt consolidation is efficient and will help the business save time.

• Cash flow can be improved

• Assuming the business obtains a lower interest rate, it will be able to hold on to more cash every month. These extra funds can go toward scaling the business or just maintaining the status quo and giving the business more breathing room. 

• Credit score could go up

• With only one loan payment, the business should manage payments better and improve its payment history. This can improve the business’s credit score, which will make the business more attractive to lenders. The chances are higher a lender will give more loans and credit offers going forward. 

Cons

• There may be upfront costs

• Some of the loans the business will pay off may contain prepayment penalties. Also, the new lender may charge an origination fee for the consolidation loan.

• A lower interest rate isn’t guaranteed

• If a business obtains a consolidation loan that has a higher interest rate or the same interest rate as the existing debt, then it will likely pay more in the long run.

• More interest will be paid over a longer repayment period

• When a business takes out a new loan to pay off old debt, the loan terms begin again. As such, the business will spend a longer period of time paying off its liabilities, so more total interest will be paid in the long term. 

• Cash flow issues are not guaranteed to be resolved

• If a business is losing money, then consolidating the debt won’t fix the problem. It would just be putting a band-aid on a long-term problem that needs another solution. 

• Credit score could go down

• When a business obtains a new loan, it can affect the debt-to-income ratio and credit score in a negative way. At the least, there will be a new lender inquiry that should bring the score down for the short term.

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