Many potential entrepreneurs, after hearing the word ‘debt’, often shy away from investing in their business venture. Gone are those days when venture debt was perceived as the last resort for funding your startup. However, things have changed of late. Today, business owners can consolidate their multiple debts into a single one and benefit when operating a business. If you can deploy funds judiciously, a consolidated debt can inspire both business owners and investors.Now, the question arises when debt consolidation makes sense for your business venture.
According to https://www.entrepreneur.com, a 2016 study in Britain revealed that about 9 percent of the startups had no defined budget. It means that these ventures are preparing themselves for some complications or problems without any set budget. For such businesses, debt consolidation is not a good idea. However, this is not the case for all. Here are some instances when debt consolidation makes sense:
When You Enjoy Maximum Flexibility
Table of Contents
- When You Enjoy Maximum Flexibility
- When Consolidation Allows You to Negotiate the Percentage
- Taking More Venture Debt than You Can Pay Off
- Avoiding Early Pay off Penalties
- Gathering Several Terms Sheets and Proposals
- Choosing Reliable Venture Debt Consolidation Providers
- Avoiding Debt Repayment Personally
- Not Taking Any Debt Frivolously
- When Offered a Loan with Realistic Fees
- When You Spend Responsibly
Many debt consolidation providers for business ventures let you withdraw funds you borrow from several allocations. You can enjoy maximum flexibility by increasing the period you have to access the money and reducing the sum you should accept upfront.
When Consolidation Allows You to Negotiate the Percentage
The more cash you need, more expensive the loan will become. The actual debt cost is frequently obscured by the addition of multiple hidden fees. Instead of negotiating each fee, consider debt consolidation so that you are in a position to discuss the proportion that such fees correspond to the size of the loan.
Taking More Venture Debt than You Can Pay Off
If you have a more or less stable financial condition and if feasible, avoid accepting more venture debt than you can repay. It might seem beneficial for you, but allow yourself more flexibility by not consenting to debt that you cannot possibly repay to your creditors.
Avoiding Early Pay off Penalties
The early payment of venture loans comes with burdensome penalties or fees. It is true that an early payment penalty of one percent of the total loan is very common, but you must not opt for the same.
Gathering Several Terms Sheets and Proposals
As far as venture debts are concerned, they are non-standard. Therefore, take some time out of your busy schedule and research. Collect multiple terms sheets or proposals, and combine them to form a perfect agreement. Then, you pick the best rate; fee, contract, interest period, and drawdown schedule to your creditors and opt for the perfect deal. Negotiate smart because it is the only way to achieve the best result.
Choosing Reliable Venture Debt Consolidation Providers
In case you violate an agreement or fail to pay off your debt, a venture debt lender can damage your business reputation. Therefore, stay away from lenders who are new in the market or a company that is lending money outside its main market fragment. Spend some time researching and making a list of lenders who are serious about their dealings with entrepreneurs. Opt for lenders who care about their market reputation and have a good record of accomplishmenttolend money to startups that practice debt consolidation.
Avoiding Debt Repayment Personally
In all circumstances, you must avoid personally assuring debt settlement. We recommend that you collateralize the same with your startup’s assets. You have much stress to handle when starting a business venture. Therefore, avoid risking the loss of your property, be it your house or car or other personal assets, in case you default.
Not Taking Any Debt Frivolously
A debt is a debt even if you consolidate multiple ones into a single one. Therefore, it makes sense only when you know that you can pay the amount back. Therefore, avoid taking any debt too lightly. Though venture debt offers startup business ventures much flexibility compared to an asset-backed loan approved by a bank or traditional financial institution, you still need to guarantee the organization’s debt to collateralize venture debt. And this includes your account receivables, intellectual property, and in some scenarios, control on your bank account. In such a situation, the lender has the right to take funds out of your bank when any startup business owner violates an agreement.
When Offered a Loan with Realistic Fees
Besides a low-interest rate, debt reconsolidation makes sense when you’re offered a sum of money at a reasonable fee. It’s also known as the origination fee, an upfront expense paid by the borrower to get the said loan. The amount is non-refundable. The fee is usually five percent and any percentage higher than this does not make sense if you consider debt consolidation. When it comes to an origination fee, it’s subtracted from the amount you borrow. For example, if you take a loan of $10,000 with a fee of five percent, you will receive $9,500. In some situations, you can negotiate the fee. Then, a lender will increase the rate of interest if it accommodates your request of lowering the fee. Debt consolidation does make sense only when you get a loan with a reasonable fee.
When You Spend Responsibly
Debt consolidation will not do your business venture much good if you spend irresponsibly. Instead of paying off your creditors on time, you apply for a new credit card and add to your existing debts. Consolidating all your debts is not a momentary solution to pay off your debts, but starting new spending habits to set your path in a new direction to make you more financially stable.
Debt consolidation makes sense only when it helps you operate your startup smoothly. However, you will find many unscrupulous companies that push unethical financial products to lure business owners. Stay away from them. Seek out only reputed and popular financial institutions offering debt consolidation facilities to startups. You can check platforms like Better Business Bureau to look for dishonest lenders, who have a bad reputation due to customer complaints. Always do your calculations to ensure that a debt consolidation plan does not prove detrimental to the interests of your business venture.
Marina Thomas is a marketing and communication expert. She also serves as a content developer with many years of experience. She helps clients in long-term wealth plans. She has previously covered an extensive range of topics in her posts, including business debt consolidation and start-ups.