Business Debt Consolidation: Could It Help Improve Your Cash Flow?

A consolidation loan simplifies your finances and improves your cash flow.

Business owner reviewing finances
Updated May 13, 2024
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When a business is burdened by debt from multiple creditors, it can be hard for the owner to grow the company. Business debt consolidation loans combine debts from two or more creditors into one, easy-to-manage payment. Some business consolidation loans can even reduce your interest rate.

In this article, we'll discuss how business debt consolidation works, the types of loans available, and how to get one of these loans. We'll also provide a couple of alternatives if a debt consolidation loan isn't right for your situation.

In this article

How does business debt consolidation work?

Before you get started, it’s a good idea to create a list of your outstanding debts to figure out how to pay off debt. You can do this on a piece of paper, on a spreadsheet, or a printout from your accounting software.

While creating this list, jot down the following information:

  • Whom you owe money to
  • The balance owed
  • Credit limit (for credit cards and lines of credit)
  • Your monthly minimum payment
  • The interest rate
  • Number of payments remaining (for term loans)

Now that you know how much you owe and your payments, you can explore your options. Business debt consolidation works by combining existing loans from multiple lenders into a single loan with one monthly payment. These loans could help lower monthly payments and provide "breathing room" by reducing the interest rate, extending the repayment term, or both.

Possible benefits of getting a consolidation loan include:

  • Lower interest rate: Reducing your interest rate could increase your profitability.
  • Lower monthly payment: A decreased monthly payment increases your cash flow to pay other bills, accelerate debt payoff, or expand the business.
  • Streamlined loan payments: Having one loan payment instead of many can make it easier to track.

Business debt consolidation loans are best for business owners who've accumulated term loans or credit card debt and are motivated to pay it off. Those with high-interest rate loans might also want to consider a consolidation loan.

What types of business debt consolidation loans are available?

When considering consolidation of existing business debt, there isn't just one type of loan for every scenario. Business owners have multiple types of loans available to them so you can pick and choose the one that works best to meet your goals.

Traditional credit union or bank loans

Many people immediately turn to a traditional bank or credit union when they need a loan. These lenders usually have bankers who are knowledgeable about small business owners’ needs and can offer products to help them meet their goals.

Bank and credit union debt consolidation loans are generally available as either a term loan or line of credit.

  • Term loans are paid out as a lump sum that can be used to pay off existing debt or cover other expenses. Payments are usually fixed, and borrowers have a defined term to pay off the debt.
  • Lines of credit offer a maximum credit line, and the business owner can request a draw or write a check to pay off other creditors. As the balance is paid down, it frees up available credit to be used again in the future.

Typically, business consolidation loans are term loans that are paid off over several years. However, some business owners prefer a line of credit because of its flexibility and the ability to reuse the credit limit for other purposes over time.

Traditional banks typically require that the business be operating under the current owner for at least two years and have a minimum amount of annual revenue in order to qualify.

Terms, rates, and fees vary by bank. Typically, terms range from 12 to 60 months, with interest rates starting at around 5%. Some banks may charge an origination fee that’s a flat amount or a percentage of the amount borrowed.

Loans amounts vary as well, but may be capped at $100,000 for an unsecured loan. If you are willing to pledge some assets as collateral, you might be able to get approved for a higher amount or a lower rate.

U.S. Small Business Administration loans

The Small Business Administration also works with partner lenders to issue loans for small business owners. The SBA doesn’t issue loans itself, but instead provides guarantees to lenders so they'll be repaid in case a borrower defaults. This guarantee gives lenders the confidence to lend to businesses that might not qualify for a traditional loan.

The SBA 7(a) loan is an option for business debt consolidation because it can be used to fund working capital, or cover everyday business costs. The SBA offers several types of 7(a) loans, and the right one depends on how much you want to borrow and how long you need to pay it back.

The bank offering the SBA loan sets interest rates, but rates cannot be higher than SBA maximums for each loan type. Fixed-rate SBA loans cannot have an annual percentage rate (APR) higher than 8%, whereas variable rate SBA loans cannot exceed Prime + 6.5%.

Some banks may also offer promotional pricing to encourage small businesses to borrow.

To qualify for an SBA loan, you must:

  • Own and operate a for-profit business
  • Be legally organized as a sole proprietorship, corporation, partnership, or LLC
  • Agree to a personal guarantee if you own 20% or more of the business

With a personal guarantee, lenders look to the owners of the business for potential repayment. Business owners may need to designate a "secondary source of repayment,” which a lender could tap into if the business cannot make payments. The secondary source of repayment can be other income streams, bank or investment balances, or equity in your home or other properties.

Loans from online lenders and lending marketplaces

Numerous online lenders and lending marketplaces, such as Fundera, Funding Circle, and On Deck, have launched to help small businesses borrow money. These companies may offer flexible terms and competitive interest rates compared with other business consolidation loan options. They typically provide or allow you to compare various loan types, including term loans, lines of credit, and SBA loans.

Because of their digital process, many online lending platforms can underwrite and fund loans faster than traditional banks and credit unions. Some even offer decisions and funding within a few days.

Loan requirements differ for each online lender, but many require that you:

  • Have been in business for at least one or two years
  • Have an active business checking account
  • Meet revenue requirements
  • Be located in a state that they are licensed to lend in
  • Operate a business in their target niche
  • Have a good credit score
  • Have no bankruptcies in the past seven years

Rates and terms vary among online lenders. In general, you can find term loans ranging from $5,000 to $500,000 at rates as low as 4.99% with terms up to 10 years. However, some lenders focus on shorter-term loans of two years or less.

What lenders might consider if you apply for a business debt consolidation loan

Any time you apply for a loan from a bank, credit union, or any other lender, they consider certain factors on your loan application. Because most small businesses are aligned very closely with their owners, lenders look at the business’s financials and the owner’s finances.

These are the primary factors that financial institutions will look at when evaluating your loan request for a business debt consolidation loan:

  • Business credit report
  • Personal credit report
  • Business financials and tax returns
  • Personal income and tax returns (secondary source of repayment)
  • Most recent business bank statements
  • Outstanding personal guarantees
  • Pending lawsuits
  • History of bankruptcy

During underwriting, lenders evaluate business profitability as the primary source of repayment for the loan. They'll look at the current debt load, minimum required payments, and the remaining term of the loans.

The underwriter may also analyze your business revenue and expense trends based on your tax returns, year-to-date financial statements, and most recent bank statements. Depending on your situation, the lender might also require a personal guarantee.

How to get a loan

When you apply for a new loan, it helps to understand the process and have a plan. Here are the steps you need to take as you apply for your business consolidation loan:

  1. Review your current finances. Compile a list of your existing debts and take note of each loan's terms. These terms include the interest rate, the amount owed, monthly payment, prepayment penalties, and personal guarantees.
  2. Determine what you want to accomplish. Are you looking to reduce the interest rate, extend the loan terms, reduce monthly payments, or do something else?
  3. Update your financial statements. Update your accounting to reflect the year-to-date profitability of your business and the balance sheet showing your assets and liabilities. Knowing your profitability and cash flow helps you understand the total loan you can afford. It also helps to prepare a personal financial statement because many lenders will require a personal guarantee.
  4. Assemble your supporting documents. Locate, scan, or download your related supporting documents. This includes personal and business tax returns, most recent bank and investment statements, and loan documents for existing debt. Having these documents readily available could expedite the loan review and decision process.
  5. Compare lenders and loan terms. Seek out potential lenders and review rates, fees, and terms. Comparing what multiple lenders are offering allows you to pick the loan that best fits your goals.
  6. Apply for your loan. Once you've narrowed down the loan choices, complete the lender's loan application. Many lenders allow you to apply completely online, whereas others require you to meet with a banker in person or over the phone.
  7. Gather additional documents requested by the lender. Although you've compiled many primary documents, some lenders may ask for additional documents during the underwriting process. It's best to reply to those requests within 24 hours to keep the application process moving.
  8. Sign the final loan documents. Once your loan has been approved, you'll receive final loan documents. These documents will detail the total amount borrowed, the interest rate, and the length of the loan. They will also indicate whether there are any prepayment penalties or personal guarantees.
  9. Loan proceeds are disbursed. After you've signed the loan documents, the lender will disburse the loan proceeds. Depending on the lender and your loan agreement, the lender may pay off your other debts directly or give you the funds to make the payments. Some lenders may require proof that the other loans have been paid off or that those accounts have been closed.

Alternatives to business debt consolidation loans

Although business debt consolidation loans can be a wise move for many small business owners, other options are better. Instead of applying for a consolidation loan, you might be better off transferring a balance to a 0% APR credit card offer or refinancing a single loan. It’s a good idea to look at all your options.

Business credit card

Business credit cards are often used to earn rewards on business expenses. But you can also use them to consolidate debt by transferring balances from high-interest cards to a card with a low interest rate. One small business credit card with a balance transfer option is the Wells Fargo Business Platinum Credit Card.

Some cards come with 0% APR balance transfer offers, which can provide interest-free financing for up to a year or more. Typically, you pay a small fee on transferred balances and enjoy a 0% introductory APR for a set period. As you pay down your debt, you increase your available credit, and it can be used to pay for expenses in the future.

Refinancing

Sometimes it’s a better option to refinance a single loan than to consolidate multiple loans into one new loan. Refinancing allows you to change the terms on one loan to reduce the interest rate, extend the repayment schedule, or change other aspects of the loan. For example, you may be able to eliminate a personal guarantee or convert the loan from secured to unsecured.

This option might be best if you have other loans that have favorable terms you don't want to disturb. The interest rates may already be low or the loan may be close to being paid off. This may also be a good choice when a consolidation loan pushes your loan request above thresholds that require a personal guarantee, more extensive underwriting, or higher rates and fees.

If you have multiple loans with unfavorable terms, you could also refinance each loan individually, rather than trying to consolidate them into one loan. You could choose to refinance through an SBA lender or another lender that offers small business loan refinancing options.

FAQs

Is business debt consolidation the same as refinancing?

Although these concepts are similar, there are significant differences. Business debt consolidation is when you combine multiple loans into one, whereas refinancing is done to receive better terms on one loan. In either case, the goal is to reduce the interest rate, lower payments by extending the term, or both.

Is business debt consolidation worth it?

Business debt consolidation can offer certain benefits. Combining your outstanding loans into one loan makes it easier to manage your debt load and focus on your business. Additionally, you may be able to lower your payments, reduce the interest rate, or both.

What are the disadvantages of business debt consolidation?

Consolidating your business debt can have its disadvantages. For instance, if the new loan is larger than any individual loan, the new creditor may require a personal guarantee by the business owner. This means that your personal finances or assets might also be at risk if you fail to make all of the required payments.

Bottom line

A small business debt consolidation loan could be a smart choice if you have multiple business loans outstanding. It might help you get a better handle on your business finances and reduce your debt-related stress. Consolidation loans might also reduce your interest rate, improve cash flow, and provide better terms.

Small business owners can apply through their local bank, credit union, an online lender, or lending marketplace. Before applying, it makes sense to compare interest rates, fees, and terms from multiple lenders to find a loan that aligns with your goals.

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Author Details

Lee Huffman

Lee Huffman is a former financial planner and corporate finance manager who now writes about early retirement, credit cards, travel, insurance, and other personal finance topics. He enjoys showing people how to travel more, spend less, and live better. When Lee is not getting his passport stamped around the world, he's researching methods to earn more miles and points toward his next vacation.

Author Details

Miranda Marquit

Miranda Marquit has covered personal finance for more than a decade and is a nationally-recognized financial expert and journalist, appearing on CNBC, NPR, Forbes, Yahoo! Finance, FOX Business, and numerous other outlets.