Is Business Debt Consolidation Right For Your Business?

If you’re dealing with business debt, consolidation might be one way to better manage your options.
8 minute read | 4/14/19April 14, 2019
worrying over business debt

Starting a business requires capital in many cases. Depending on your business, you might need to borrow if you expect to raise the funds you need.

Over time, however, multiple business loans can seem unwieldy. One of the ways businesses pay off debt is by consolidating their loans in a way that gets everything in one place so they can better manage payments — or even get better overall terms.

Can you consolidate business debt? Let’s take a look at how business consolidation loans work so you can make the right choice for you and your business.

How business loan consolidation works

“A debt consolidation loan pools all of your outstanding loan balances into one loan, preferably with a lower interest rate to save you money,” says Priyanka Prakash, a lending and credit expert at Fundera. “This allows for a manageable monthly payment.”

Consolidation is different from refinancing your loans. With refinancing, you work with your lender to replace the loan with a new business loan, usually one with a lower rate and a different term length. Each of your business loans has to be refinanced separately.

When you consolidate business debt, on the other hand, you get one new loan that’s large enough to pay off your other business loans. You use the funds to pay off your smaller loans, and now you only have one interest rate and one monthly payment, rather than trying to juggle multiple loans and payments.

When to get a business consolidation loan

Business loan consolidation isn’t just about trying to keep your debt under control. Instead, says Tricia Tetreault, a financial analyst with FitSmallBusiness.com, a business education website, it’s important to consider your personal and business financials.

“If you’ve had a recent improvement in your personal or business financial situation, it may be the right time to consider a business debt consolidation,” says Tetreault. “Consolidating at the right time can get you lower interest rates, better repayment schedules, and longer terms.”

Tetreault suggests you consider whether you’ve had time to improve your business profile in the last year and whether your personal finances have improved as well. She also points out that a business consolidation loan can make a lot of sense if you’ve reached a new milestone.

“The longer you’ve been in business, the more likely you are to qualify for better interest rates,” says Tetreault. “You can consolidate your loans up to this point and free up more cash flow to improve your business.”

Eligibility

Some of the eligibility items to keep in mind as you move forward in consolidating your business loans, according to Treault, include:

  • Being in business for at least one year
  • Having an annual revenue of $100,000 or greater
  • Establishing some level of business credit
  • Having a personal credit score of at least 600

Additionally, you should have more than enough cash flow to service the debt. You don’t want to be borrowing more each month to meet your other business costs while covering your debt consolidation obligations.

Business debt consolidation loans

When getting business debt consolidation loans, you have a few options. Depending on your situation, one type of loan might work better than others.

Traditional bank loans

Many traditional banks offer business loans and are willing to help you consolidate business debt. However, you might need better personal credit in order to qualify for one of these loans, points out Prakash.

“People like these loans for debt consolidation because they offer low interest rates and long repayment terms,” she says.

The bank is taking on risk, though, so there might be stringent requirements. You need to show your business is doing well, that you can handle the debt, and have good personal credit before a bank is willing to lend you enough money to consolidate your business debt.

SBA loans

You can get an SBA consolidation loan through a traditional bank or other lender. Basically, an SBA loan is a small business loan that is guaranteed by the government. They might be easier, in some cases, to get because the lender isn’t taking all the risk on their own.

However, Tetreault points out, you do have to make sure your original business loans were for purposes that are SBA-approved. Additionally, she says there are other qualifications that come with SBA business consolidation loans.

“Obtaining one can take two or three months,” Tetreault says. “However, SBA loans are likely your cheapest consolidation option, making them a good option for many business owners.”

Online installment loans

It’s also possible to consolidate business debt using online installment loans. Lenders provide you with the ability to consolidate your debt quickly, sometimes allowing you to get access to funds in less than a week. Additionally, some of the credit requirements are less strict, allowing you to consolidate business loans, even if you’ve had some issues.

However, these loans might have higher interest rates, so you may need to be prepared for the higher fees.

Comparing loan options

When looking for business debt consolidation, there are some options to consider. You’ll want to think about where you’re at in your personal and business finances as well as compare rates and repayment terms.

Fundation SmartBiz Funding Circle Lending Club
Best for Businesses with employees and that need flexible terms Established businesses looking for SBA loans Small businesses looking to grow Small businesses hoping to grow
Loan amount Up to $500,000 $30,000 - $350,000 $25,000 - $500,000 $5,000 - $300,000
Term length Up to 4 years 10 - 25 years 6 months - 5 years 1 - 5 years
Interest rates 7.99% - 30% APR 7.00% - 9.25% APR 4.99% - 27.79% APR Starting at 5.99% APR
Payment frequency Twice per month Monthly Monthly Monthly
Personal credit score 620 650 620 600
Time in business 1 year 2 years 2 years 1 year
Business revenue $100,000 $50,000 N/A $50,000

Your final terms will depend, in large part, on how much you borrow, how long you plan to take to pay off the loan, and your credit score. While your business credit is likely to be considered, the reality is your personal credit is a major part of approval when you’re consolidating business loans, and it makes a big difference in your ability to get the best rates.

Some lenders also require other information about your business, including:

  • Collateral
  • Business plans
  • Financial projections
  • Financial records

The more you need to borrow to consolidate business debt, the more information you’ll be asked to provide.

Is consolidation a good way for businesses to pay off debt?

Pros Cons
  • Conserves cash flow
  • Simplifies multiple loan payments into one
  • Saves you money
  • Can provide you with additional funds if you borrow more than required to pay off debt
  • Smaller business loans are unsecured
  • Interest builds over time
  • Doesn’t result in forgiveness
  • Some lenders charge origination fees
  • Larger loans might require collateral
  • Doesn’t address deeper problems related to how you ended up in debt

Depending on your situation, a business consolidation loan can be a good way to pay off your business debt. However, before you proceed, understand the pros and cons involved.

Pros

There are some definite advantages to using consolidation to pay off business debt. In fact, many businesses use these loans to improve the situation and make headway. Here are some of the advantages to business debt consolidation:

  • Free up monthly cash flow: If your monthly resources are being eaten up by interest and payments, a debt consolidation loan can help you free up some of that cash flow. Consolidation reduces the number of payments you make and usually the amount you pay. The extra cash can be put back into your business to help it grow.
  • Simplifies your payments: Rather than trying to remember to make multiple payments, consolidation helps you get everything under one roof. There’s only one payment to worry about, so you aren’t likely to miss something.
  • Save money on interest: In many cases, business debt consolidation results in a lower overall interest rate. This reduces how much you’re paying in interest charges and allows you to tackle your business loans faster while freeing up money for your business.
  • Additional funds: It might be possible to borrow more than you need to pay off your debt. You can get payments under control, improving your cash flow, while at the same time getting a chunk of extra capital to help grow your business and take it to the next level.
  • Unsecured debt is possible: If you need a smaller business loan, you might be able to get it without providing collateral. This can be an advantage if you don’t want to put some of your assets at risk as you consolidate the debt.

Cons

While there are advantages, you might also run into some downsides when you consolidate business loans. Carefully consider the risks before consolidating your business debt.

  • You’re still paying interest: Over time, you’ll still pay interest. If your debt consolidation loan extends your debt out by 10 years or more, even a lower interest rate might not save you money in the long run. Interest can build up, especially if you get a loan that lasts 20 or 25 years.
  • This isn’t loan forgiveness: If you’re in dire straits with a business that’s losing money, debt consolidation might not save you. Consolidation isn’t forgiveness or bankruptcy. If you’re in a truly desperate situation, this might not be the right move for you. You may need to turn to some type of debt relief program.
  • Origination fees: Some lenders charge origination fees, which are rolled into the loan, making it more expensive. Carefully consider if your interest savings are enough to offset the cost of the origination fees.
  • You might need collateral: For larger debt consolidation loans, collateral might be required. You may need to provide the title to a building you own or some other type of property. Additionally, you might need extra paperwork, such as business plans and projections when you get bigger loans.
  • Consolidation doesn’t address deeper issues: Debt consolidation might address some of the symptoms, but it doesn’t take care of all the deeper issues. You might need to address cash flow problems, financial management issues, or other problems. If you don’t address them, you might get even deeper into debt.

Every business is different

How do businesses pay off debt? It’s different for every business. Debt consolidation can be one way to make business loans more manageable and can even help you as you move forward in the next phase of your business.

However, it’s important for you to carefully consider the options and be realistic about where you are with your business. If your business is, in general, growing, but you have some cash flow issues on occasion, debt consolidation can help you smooth them while allowing you to tackle your obligations.

On the other hand, debt consolidation isn’t always the solution, and timing can be a big deal as well. If you’ve managed to establish yourself, and you’ve improved your situation, business debt consolidation can be a big help.

Just be careful, warns Tetreault: “Consolidating at the wrong time can waste your time, damage your credit, or get you a bad loan that can hurt your ability to borrow in the future.”

Carefully consider where you stand, and then make a decision that’s right for you and your business.


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