Raising funds to finance a business or capital venture can leave an individual or business indebted to different creditors, especially as most business borrows funds to finance the business. Such borrowing becomes necessary because the business may need more funds to meet the seasonal needs and expansion of business.
Therefore, the creditors, investors and financial institutions become the main source of loans. It is even more remarkable when in other to take advantage of different offers the business obtain loans from many sources.
The obligations to meet up the loan repayment can however turn out burdensome particularly as there is duplication of the burden of repayments and the business may not be as liquid to meet up with the different loan repayment schedule. Liquidity in this case being the cash turnover of the business is used to repay the business creditors. A remedy for such a situation could be a debt consolidation loan to ease the burdens of debt repayments to different creditors.
The debt consolidation loan is simply a single loan taken to pay back other outstanding debts which the business or businessperson owes to different creditors. It is a useful tool in meeting financial obligations because the obligation of paying back loans to different creditors can become a burden interfering with the smooth running of the business or venture.
For instance, a loan obligation to four different creditors amounting to four million naira can be offset with a single loan of the same amount from a single creditor making the debtor liable to just one creditor. This as it were takes away the burden of meeting varying loan repayment schedules and the burden of varying interest rates that the different creditors charge on their credit.
The new creditor’s emphasis is on the security of the loan issued, in terms of collateral, which will be the determinant of the loan given in the first place. He said that what hinders the efficacy of the subject in Nigeria is the fear that when the borrower reveals the true situation that the reason for a loan is the repayment of other loan obligation, the loan request may not be honoured.
This according to him is a misconception because the main issue in giving any loan is the security of such loans which when provided is at the borrower’s risk, mentioning that the current security free loan is that provided by microfinance banks. Ose Bayo, an independent investment analyst also spoke with Business Day on the subject of using the debt consolidation option to save a business the burden of duplications in loan repayment obligations.
He said that corporate individuals hardly use this option in Nigeria because even though borrowed funds for investment is gotten from different sources, the probability is that the repayment schedules may be different in terms of the timing. This according to him enables the business to meet up the various obligations.
He however said it might constitute a burden to the business or borrower, as the funds of the business may be going into servicing one loan or the other capable of resulting in insolvency. Although, the debt consolidation loan can give respite to the issues of proliferated debt repayment obligations, experts say that there are certain factors, which the borrower should look into before taking such a loan.
The time the debt consolidation loan will run should be taken into consideration because a shorter-term loan increases the loan burden since the repayments will be frequent especially in the short term.
In addition, the amount of money borrowed and the interest charged on the loan is important because a higher interest charge on loan for consolidation purposes is burdensome as well.
Others however, maintain that a shorter-term debt consolidation loan is appropriate in order to pay off such loan quicker. Not only will you save money in interest charges but also there is the gain of becoming debt free sooner. According to them, going for the lowest possible payment, will mean staying in debt for a much longer period and that could have an adverse effect on your future.
The terms of the loan consolidation will however depend on the motive of the debtor, which may be to pay off the debts as soon as possible to be free of the repayment obligations or to spread the repayment period to conserve funds for other business transactions obligations.
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