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Debt consolidation method - Basic guide

Julianne Leybag
03 April 2018 5 minute readShare
Debt, coins, money

Considering debt consolidation to manage and settle your multiple debts? Business owners/managers need to first understand both their current business situation and debt repayment obligations to select the best debt consolidation method that best fits their needs. Here’s how.

Debt consolidation helps business owners manage multiple debts by making it much easier for them to fulfill their debt repayment obligations at a lower interest rate. Before commencing debt consolidation, the following must be done first:

  • Make a financial inventory
  • Manage cash flow
  • Consider debt snowball payment
  • Sell redundant/unnecessary assets

Make a financial inventory

Prepare a list containing all assets and liabilities. This list will help business owners understand where they stand financially. This will also help form a clearer picture of how much they exactly owe, down to the specific amounts, and to whom.

Making the list helps business owners check and figure out their current financial capability to pay all of their debts.

Manage cash flow

Business owners must look into, study, and evaluate their cash flow. Business owners should also consider if there are other ways for them to earn extra income.

Of course,business owners/managers, should only engage in looking for ways to generate extra income if they are sure it doesn’t negatively affect their performance of duties and responsibilities to the business.

Consider debt snowball payment

Business owners must understand the debt snowball payment method and decide whether it suits their needs. This strategy involves paying off debts from the smallest to the largest one(s).

The process will then gain momentum as each balance is paid off. Fully paying off the smallest debt, then roll the money being paid on said debt to the next smallest owed amount.

Start by listing debts in order of smallest to largest. Next, make minimum payments on all other debts except on the smallest one. Then pay as much as possible on the smallest debt.

Continue and repeat the said process until all debts are paid in full.

Business owners can then proceed with the debt snowball method if they think that this is right for their needs.

As always, it is best to consult and speak with a trusted financial adviser for assistance and guidance.

Sell redundant/unnecessary assets

Deciding to finally settle debts by commencing debt repayment comes with the reality of business owners having to make tough choices and decisions. Let go of assets that can be sold immediately.

In some cases, a one big-ticket asset can cover most if not all debts. Business owners might also need to identify several assets they can sell to cover all of the amounts that they owe.

Is debt consolidation the right approach for business owners? Consider the following:

  • Business owners have to manage the repayment of multiple loans or sets of loans — with debt consolidation, they will only need to make a single payment on a regular basis, ensuring savings on transaction costs. In addition, the risk of business owners missing the payment due date accidentally/unintentionally will be reduced to the barest minimum, as payments done when debt consolidating are scheduled specifically regularly
  • Business owners expect their debt consolidation loan to require a longer repayment term and/or period — employing debt consolidation will result to smaller regular payments. This will allow for larger disposable income that will, in turn, lower the risk of default. Simply put, all these ensure that businesses don’t get into more future debts.
  • If business owners have a considerable credit card debt, they can pay back what they owe at a lower interest rate and also save money with a debt consolidation loan.

To effectively commence and effect your debt consolidation plan, consider the following strategies:

  • Ask for debt amnesty from creditors
  • Transfer balance to lower interest rate
  • Apply for a debt consolidation loan

Ask for debt amnesty from creditors

Meet and speak with creditors and apply for debt amnesty from each one. This is when business owners are no longer able to pay the amount they’re asking and then negotiating for a lower amount that business owners will promise to pay.

Asking for debt amnesty is done so business owners can make sure that they keep their creditors from compounding debt(s) with interest fees, and instead seeking from them a fixed amount which needs to be paid.

Business owners must have a thorough understanding of their debt repayment needs since this will guide their objectives and decisions in negotiating with creditors.

Transfer balance to lower interest rate

It is possible to transfer all balances into a single credit card provided that all debts are credit card debts. The thing to look out for here is the interest rate. Transfer balances only if business owners are indeed shifting them towards a lower interest rate. Otherwise, the transfer defeats its own purpose.

As an example, say a business owner has three credit cards with different monthly interest rates. The business owner should then inquire and ask one of the credit card companies —the one that offers the lowest interest rate among the three—if it is possible to transfer the other two of their credit cards’ balances to them.

Once done, they can now proceed with cutting their other two credit cards.

Doing so helps in efficiently fulfilling debt repayment obligations. Business owners will only need to remember one payment schedule/due date, which will allow for more convenience in managing their cash flow.

Apply for a debt consolidation loan

Applying and getting approved for a debt consolidation loan has similar characteristics with engaging an unsecured loan. Of course, businesses with proof of stable and more promising future income(s) have higher chances of qualifying and finally getting approved for one.

Notice the similarity between transferring balance to a single credit card and getting a debt consolidation loan. The key difference between these two, however, is that with a debt consolidation loan, business owners use the money from the loan to pay off all debts.

Once effectively employed, they will be paying fewer fees on interests, allowing for more room to breathe.

A debt consolidation loan works especially well when coupled with debt amnesty from creditors. Now that business owners can immediately settle debts from all of their creditors, the only thing they need to worry about and attend to is paying their debt consolidation loan to the bank.

Before proceeding with a loan, it is important to thoroughly understand first the difference between debt consolidation loan and debt consolidation program, and how they work.

Business owners should also remember the following:

  • Take the time to choose and only decide on the debt consolidation method that is right for the budget and that satisfies both the current business situation and debt repayment needs
  • Understand that there are a variety of loan options or balance transfer deals that could assist business owners in saving more money. If unsure, consult and speak with a financial adviser or an expert professional so business owners will be able to select and/or customise their own debt consolidation scheme
  • Take a disciplined approach and avoid the temptation of reloading their credit card and/or making unnecessary expenditures
  • Always stick to a realistic and realisable spending budget—this is vital to the success of the entire debt consolidation and debt repayment plans.

After identifying and deciding on the right debt consolidation method that best suits the present business situation and debt repayment needs, business owners will see and feel the benefits of consolidating their debts.

These benefits include a lower interest rate on consolidated debt,  an improved credit rating, and, eventually, the complete and well-informed control of their finances.

All of these will empower business owners to work their way on finally becoming debt-free!

Debt consolidation method - Basic guide
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Julianne Leybag

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