“We are only as strong as we are united, as weak as we are divided.” – Dumbledore in Harry Potter and the Goblet of Fire

Optimising Your Small Business Loans With ‘Debt Consolidation’

The title quote could apply just as well to your loan book as it does to Rowling’s book! Habitually, borrowers have preferred to borrow from multiple sources, in multiple forms. A Term Loan from Bank ‘A’, a Working Capital Facility from Bank ‘B’, a Loan Against Property from NBFC ‘C’, an Overdraft from Bank ‘D’, and so on. The reasons for doing so are varied: changing needs over time that require additional borrowing, perception that distributing the lender base and type of loans increases borrowing ability, and a false hope that the true extent of leverage cannot be clearly assessed by a new lender.

Some of these reasons may have been valid in a pre-digitisation era and in a time when credit scores and records were not consolidated in one source. However, these perceived advantages have been rendered totally irrelevant now.

The Cost of Multiple Loans Pinches Your Small Business

There are tangible costs attached to scattered borrowing. Most importantly, the sub-optimal arrangement ends up increasing cost of borrowing and in effect also reduces ability to borrow. Your shorter tenor loans and cash advances may typically have an annual interest rate as high as 22-26%. These high costs hurt you at the time of cash flow volatility in your business. Other than this, your present needs and financial situation may be quite different (for better or worse) from when you actually started some of your facilities.

The Debt Consolidation Solution

So what is Debt Consolidation? Under this arrangement, a lender (bank or NBFC) consolidates all your facilities, loans, and borrowings into a single arrangement. This enhances your credibility as a borrower, reduces your administrative costs of managing multiple facilities and lenders, and in most cases also lowers the effective interest outgo due to scale advantages, i.e. having a larger facility with one lender versus being a small ticket borrower with multiple lenders.

Hence, with one shot you can lower your interest outgo on all your high cost loans and plough that surplus cash in your business for expansion, marketing or working capital needs. Financial planning becomes much easier since you now have a clear estimate of your leverage and more importantly, a clear idea of your obligation on that leverage. Debt consolidation may also free up high value collateral that was so far locked with a smaller value loan. This further helps you increase your borrowing power and raise additional funds for your business.

A good example is second mortgages on property or equipment. If you were to approach another lender to get a second mortgage, this arrangement will probably not have a pari passu charge (i.e. the proceeds from sale will go entirely towards satisfying the first lender’s dues) and hence being higher risk for the lender, will carry a higher interest rate. When the debt is consolidated, these kind of top-up or second mortgage arrangements come at a much lower cost due to:

  1. Familiarity with the borrower;
  2. Value of the larger relationship;
  3. Ease of conducting an objective risk assessment; and
  4. Your credit score may have also improved since you took your first loan based on your loan servicing track record

The appetite for consolidation among lenders is also high – as per some analyst estimates, as much as 70-80% of loans given out by banks and NBFCs are takeover loans.

So are you stuck with a lender you don’t like? Do you see no headroom for further borrowing? Frustrated with managing many EMIs and relationships? Contact Loan Frame now.

We can help analyse your existing arrangements, assess the scope and extent of consolidation that is possible, and actually hand hold you in this process of consolidation in order to improve your ability to raise additional funds as well as lower cost of borrowing. 5-10 days is all it will take for this peace of mind.

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