Why Startups Can Rely on Debt Consolidation to Get Back on Track After a Financial Collapse

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Startups are built on nothing more than some great ideas and big dreams. They rarely have a big corporate structure to fall back on, they run on skeletal employee strength, and they usually are short of cash. The lack of an organizational structure and lesser employees (and therefore fewer hierarchies) are typically touted as strengths for startups, but the shortage of money is never a happy situation to be in. So sooner or later, if the startup does not have a prominent investor who keeps bankrolling the efforts of the owner, loans are required to keep the business running. If the base of the startup is strong enough, getting loans becomes easy, and it often leads to a pattern of borrowing money till the startup finds itself juggling multiple loans with different rates of interest, repayment schedules, and tenures.

There are too many problems that a startup faces, and very few people to handle them, and this management of loans is a new burden that it must deal with, a new cross it must bear. Is there a way out of this debt trap for a startup? Can it do something to make the management of these multiple loans easier? Yes, there is, and it is called debt consolidation. Before we understand what that is, let us see if there are any ways in which a startup can avoid getting burdened with too much debt.

The why and what of a loan

If it has become imperative for a startup to apply for a loan, the owner should try to understand what purpose the money will serve. Will it be to fund a one-time expense, or would it be to meet certain recurring costs? Accordingly, the startup could go for a term loan or line of credit.

The capacity for repayment

While applying for a loan, a smart startup owner would not think of what amount he needs to borrow. He would instead think about how much his present business condition would allow him to repay every month. Once he has done this calculation, he should cut his coat according to the cloth and apply for only that amount of loan, even if it is slightly lesser than his requirement.

Choose cheaper loans

When it comes to individuals, credit cards are the costliest line of credit, as per experts  but usually, startups might not have those. The startup should take a loan, if at all, which has the lowest rate of interest, even if it has a smaller amount or a slightly longer tenure.

Have a secondary income stream

A startup takes months and sometimes years to get running and generating handsome profits. In those initial months, it is always a good idea for the owner(s) of the startup, or the startup itself, to do some additional work on the side that can bring in some cash flows, however small.

Let’s say the above thumb rules were all followed by a startup, and still, it managed to run up multiple debts. Let us understand a little more about a good solution to such a scenario – debt consolidation loan.

What are the criteria for debt consolidation for a startup?

The requirements for a startup to get a debt consolidation loan are pretty straightforward, although they might not all be easy for a startup to fulfill. The startup should have been in existence for at least six months. It should have an acceptable credit score. Finally, it should be able to demonstrate a cash flow (this might be the most difficult one). If a startup can meet these criteria, it can get a debt consolidation loan to replace the existing loans at better terms. It is an excellent solution for startups to get some breathing space and also get things more organized. Let us see how.

Lower repayments

It is the biggest and most attractive benefit that a startup gets while opting for a debt consolidation loan. Since the interest rate on the debt consolidation loan is low, the monthly payouts become considerably less.

Breathing space

Because a debt consolidation loan replaces several loans, it gives the startup some space and time to get things organized. There is only one loan to worry about instead of multiple payment dates and schedules. The fact that this single loan also has a lower repayment amount is also a source of some relief to the startup.

More time

Some people might consider this as a disadvantage. The debt consolidation loan provides a lower rate of interest, and it often comes at the expense of an increased tenure. While some people feel this is a disadvantage, but for a startup, this acts as a boon, because it stretches out the amount of time they have for repayment, and they also need to pay lower amounts.

Cash in hand

A debt consolidation loan could work in two ways. It could credit the full loan amount into your bank account and let you decide how to repay and close your other loans, or it could connect with all your creditors directly, and refund the amounts to them. If yours is of the first variety, you get much cash on hand for some time, and then you can decide in what order and to what extent you want to tackle your existing loans. It is good for someone who can be disciplined. However, for someone who is prone to slipping back into earlier bad habits, it might signal deeper trouble.

Debt consolidation – a boon

There might be several factors that cause a startup to succeed, but a good debt consolidation loan is a factor that can prevent its failure. If judiciously selected, a good debt consolidation program can make things brighter for a startup and allow it to focus on its core work rather than worrying about multiple loans. A startup can choose from several available options and select the debt consolidation that can become a boom for it.

Marina Thomas is a marketing and communication expert. She also serves as 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. You can follow her through the buttons below.