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June 15, 2023

Business debt consolidation: A strategic case for extended-term financing

Reasons to consider taking a loan to pay for a vacation

Debt consolidation loans can lower your total monthly payments, while helping you grow your business. You can take the cash you save each month post-consolidation and reinvest the funds into income-producing initiatives.

We’re going to reexamine an example from our previous blog, “How to consolidate business debt,” to illustrate how long-term financing can result in substantial returns for business owners.

How debt consolidation works: An illustrated example

Let’s assume that you are the sole owner of an optometry practice.

You have two credit cards with a total principal of $40,000 and 25% average annual interest rate. In addition, you have a $70,000 business loan with 15% annual interest rate and a 3-year repayment term. You owe a total of $110,000, not including interest.

In this scenario, you would need to pay $4,025 a month for 36 months to bring the balance down to zero.

However, if you’re ready to scale your practice, you can decrease your monthly payments and free up funds to invest in business growth by consolidating your debt with a longer-term loan. Here’s how.

Taking a 7-year debt consolidation loan will decrease your monthly payment from $4,025 to $2,128. That’s 47% lower than your previous financing.

Image is an example only and does not reflect actual customer information.

Plus, you’ll be simplifying your debt bills into a single payment, allowing you to spend less time managing your debt and more time focusing on your business. 

So what's next?

Now that you’ve consolidated your debts, you’ll need to identify the best way to use the $2,000+ you’re saving on a monthly basis.

You may have immediate ideas for growth, or you may take a more exploratory approach, researching the next opportunity to create long-term value. Regardless, you need to ensure that the monetary return from the new income-producing initiative outweighs the delay in repaying your debt.

Going back to our example:

Let’s assume that your optometry practice is located in a suburban community. You’re currently operating with three staff members and are able to conduct one exam per hour, earning you annual gross revenue of $600,000.

The revenue of the practice is highly correlated to the number of exams conducted—increasing productivity boosts annual gross revenue.

If you could increase your productivity to 1.3 exams per hour (from your current one exam per hour), your annual gross revenue could increase to almost $800,000.

To accomplish this, you’d need to delegate more testing tasks to staff and establish efficiencies within the exam process and the scheduling of appointments, among other improvements.

In other words, you need additional support.

This may seem counterintuitive for a small practice with a single optometrist. To save on expenses, you may be performing some of the testing and administrative tasks yourself, rolling up your sleeves in ways that are unusual in larger business environments. But in this example (and many others), you have to keep in mind your value as an expert in your field. The value of an optometrist is 5x greater than that of any staff member.

The savings of $2,000 per month that you achieved as part of consolidating your previous debts can be repurposed to hire a part-time optometry technician. The new hire can assist you and your existing staff with administering preliminary tests, maintaining medical records, preparing exam rooms, managing schedules—and numerous other day-to-day activities that increase the overall efficiency of your practice. Now, with the extra headcount, you can work toward boosting your key revenue-generating metric: exams per hour. 

Of course, every business is unique, and each company will have different growth options with varied returns. So, be sure to evaluate the effectiveness of any potential opportunity when deciding to postpone the repayment of your debt.  

Let’s talk about total interest

Unfortunately, there’s no way around it. Extending your repayment term will result in you owing a higher amount of total interest over the life of the loan. In our example, total interest owed increased from $35,000 for a 3-year term to $69,000 for a 7-year term at the time of debt consolidation.

That’s a significant jump.

However, the expected improvement in productivity, if achieved, will lead to more significant gross revenue gains—as we explained above, an increase from $600,000 to almost $800,000 in gross revenue on an annual basis.

That’s well worth an extra $34,000 in total interest. And this is just one way you can use debt strategically to achieve long-term financial goals.

The advantages of an extended-term1 loan from BHG Money

We understand that, as a business owner, you may prefer a longer repayment period to obtain lower monthly payments and more financial flexibility.

BHG Money offers terms of up to 12 years1 on loans up to $500,0001,2 with first-class concierge service every step of the way.

Get started online by viewing your personalized estimate today. Click here.

¹Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile. Finance amount may vary depending on the applicant's state of residence. Call for complete program details.
²BHG Money business loans typically range from $20,000 to $250,000; however, well-qualified borrowers may be eligible for business loans up to $500,000.
For California Residents: BHG Money loans made or arranged pursuant to a California Financing Law license - Number 603G493.
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