You have signed with too many banks and now seem to bearing the consequences; can debt consolidation alleviate your burdens?

So you shopped and signed with one bank too many? With so many tempting offers, it seemed so right at the time. But now the situation is not so rosy and your finance department head is frowning when the banks call. The accounts department has thrown up their hands. It will be both human and prudent to look at debt consolidation as a good option at this stage. This would be a good time to put all your eggs in one basket and let the experts handle the situation. "Debt consolidation happens when the company takes one loan to pay off multiple debts," said Iyad Mourtada, managing director at OpenThinking, a business learning platform for executive development in leadership, entrepreneurship and innovation.

There are two kinds of debt consolidation business loans - secured debt consolidation business loans and unsecured debt consolidation business loans. To avail secured debt consolidation business loans, you will have to place one of your properties as collateral against the loan amount, noted experts. This could consist of personal property like your home, vehicle, gold and so on. Such type of collateral will help you to avail debt consolidation business loans at lower interest rate and with flexible repayment duration. On the other hand, if you decide to take an unsecured debt consolidation business loans, you will have to pay a higher rate of interest rate when compared to secure debt consolidation business loans. This also means that the size of the loan amount is smaller compared to a secure one. Zawya asked the experts to list the pros and cons of going in for this option.

Pros

Lower rate of interest: This can be beneficial if the company is paying its credit card loans with high interest rate by taking a bank loan with low interest rate," said Mourtada. "Another benefit is when the business replacing their short-term loan with a long term loan to meet their business needs," he said. This is a highly favorable situation.

  • Better pricing: "If you are able to consolidate with one or two banks, then you are able to negotiate a better pricing and repayment terms. In certain cases, you may get value-added services at nominal or discounted rates." Ehsaan Uddin Ahmed, Global Transactions Services and SME head (Corporate Banking Group) at Noor Islamic Bank. The entrepreneur must be wise to sit down and negotiate these terms with the institution to his or her advantage at this point.

  • Better deal: "The benefit is that all the debt is held by a single lender who can understand your business in great detail. Generally, by consolidating the loan, you get a better deal," said Edward Roderick, co-chairman and managing partner at Envestors MENA, a UK-based business angel network with an active regional presence in the Middle East and headquartered in Dubai. This can save you money and you are in a phase where every penny does count.

  • One-stop explanation: It reduces the time that you have to spend in meeting with the banks and explaining the situation to multiple people, added Roderick. That is a big relief for an entrepreneur who is already in the doldrums and dealing with the issues of the day-to-day business and keeping it afloat, keeping staff morale high and looking out for new sources of revenue.

    Cons

  • Need collateral: However, most debt consolidation loan will require some form of collateral, said Mourtada. "This will create a huge risk - in case you cannot pay the interest payments," he warned. Which means that you might get into deeper problems than when you started by losing your personal assets - not the best of situations.

  • Too dependent "If you decide to consolidate with one bank, then you become entirely dependent on one lending institution, which will then have lot more leverage over you," warned Ahmed. It is better to keep the relationship spread between one to three banks to keep it at an optimum level. "Hence spread your risks and relationships. If you are a trader, the banks will set different limits and may varying options on the types of volume that they can handle," he said. You need every lifeline at this point. Get it.

  • Lender has issues: The lender itself has difficulties and have been overnight instructed to reduce the overdraft limits to their clients, said Roderick. "This might end up in no working capital. By being diversified, it might not happen at the same pace. Hence, large companies have syndicated loans with a leading bank that can coordinate with 15 or 20 other banks," he advised.

    Zawya BusinessPulse 2013