How to consolidate business debt

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When you have your own business — whether you’re just starting out or you’ve been doing it for years — cash flow isn’t always a constant. Sometimes you need to pay for unexpected expenses, make payroll or fund new equipment. If you don’t have the cash on hand to afford those things, you might need a business loan.

If you’ve resorted to taking out a few business loans, you might make many different payments to them every month. This means keeping track of different due dates, interest rates and balances. On top of running a business, you might feel like managing the loans is too much to handle. In this case, you may want to look into business debt consolidation.

How business debt consolidation works

Business debt consolidation is when you take out a new loan to pay off your existing business loans and debt. By taking out a small business debt consolidation loan, you’re moving many debts into one streamlined monthly payment.

Most often, business debt consolidation works like personal debt consolidation. When looking for a business debt consolidation method, you’ll want to look for loans that offer lower interest rates than what you’re currently paying.

You’ll also want to make sure that the loan covers all the outstanding debt you’re trying to consolidate. For instance, you may find a loan that covers $30,000 in business debt, but your debt might be $50,000. If that’s the case, you’ll want to look at a higher loan maximum.

What’s the difference between consolidating and refinancing my business debt?

Consolidation and refinancing are very similar, but there are a few key differences.

  • Refinancing: You take out one loan to replace another one, preferably with a lower interest rate and better repayment terms. You don’t necessarily need to have many types of debt to refinance; you can refinance one loan with another one.
  • Consolidation: This is when you replace many types of debt — including loans — with one loan. When you receive your new loan funds, you’ll pay off your existing debt with that money. Then you’ll make one monthly payment to your new loan.

While the two are different, you can still manage them in the same way. For instance, if you’ve previously had a business consolidation loan, you can refinance it to take advantage of a lower interest rate.

How to get a business debt consolidation loan

While every lender will have different requirements, most will look at factors such as your income, credit score and debt-to-income ratio. Below are several steps you can take to obtain a commercial debt consolidation loan:

  • Check your credit score: Most lenders will require that you have a score of 650 or higher. However, some lenders specialize in bad-credit loans and may work with you if you have a score in the upper 500s.
  • Go through an initial consultation: Before you can get a loan, you’ll have to go through an interview process with an underwriting team that will determine whether you’re a good candidate for debt consolidation.
  • Submit financial documents: You’ll likely need to give a lender the following documents:
    • Future sales projections.
    • Several years’ worth of personal and business tax returns.
    • Personal financial statements.
    • A list of all debt.
    • A list of all equipment.
    • Several years’ worth of profit and loss statements and balance sheets.
  • Initial review: Once you turn in the required documents, the lender will review them. If you pass, you’ll receive a prequalification letter that outlines the loan terms.
  • Due diligence: The lender will authenticate the information you provided and research your tax background and any previous lawsuits. If you pass this part of the process, you’ll receive a commitment letter.
  • Final steps: Your potential lender will need to check a few documents involving your original loans and asset titles and a 12-month payment history.
  • Close the deal: Once you complete these steps, you’ll be able to sign the final documents for your business debt consolidation loan.

Should you consolidate your small-business debt?

So is business debt consolidation worth it? This method may be a good option if you want to streamline your payments, but you should be aware of the risks before applying.

Pros of debt consolidation

  • More manageable payments: If you have many different payments, due dates and interest rates to keep track of, debt consolidation streamlines them. You’ll have a better handle on your payments, making it easier to keep track of what you owe and when you need to pay it off.
  • Improved cash flow: If you score a lower interest rate, you’ll be able to keep more cash in your business every month. This can go toward important purchases, payroll or other business needs.
  • Possible credit score boost: If you can manage payments better with one loan payment, you’ll have a better payment history. This can boost your business credit score, and it looks great to lenders. They’ll be more likely to give you loans and credit offers in the future.

Cons of debt consolidation

  • Lower interest rate isn’t guaranteed: If you get a loan that doesn’t have a lower interest rate than what you’re paying now, you could end up paying more than what you currently owe. Unless you can secure a lower interest rate, business debt consolidation might not be worth it.
  • Paying more interest over time: When you take out a new loan to replace old loans, your loan terms start over. That means you may spend more time paying off your loan, and you’ll likely pay more total interest in the long term.
  • Your cash flow issues might not get resolved: If your business is hemorrhaging money, a debt consolidation loan won’t solve your financial issues. It’ll be a short-term fix without a long-term strategic solution.

Best business debt consolidation options

If you’re thinking about consolidating your business debt, you have a few choices based on your situation.

Bank loans

Banks and credit unions are some of the most easily accessible options to get a debt consolidation loan for your business. There are usually plenty to choose from, and big financial institutions typically target business customers. Large institutions like Chase and Bank of America may be good places to start.

But keep in mind that you usually need to have a strong credit history to qualify for a bank business loan. Depending on the institution, you may need to have been in business for a few years and showcase your company’s income to be eligible.

Small Business Administration

Small Business Administration (SBA) loans are administered by the federal government specifically for small companies in financial need. They’re made to help companies without a big financial cushion grow and succeed.

While banks might want years of established credit, SBA loans are made for companies just starting out or those that aren’t as financially stable. SBA 7(a) loans can be used for debt consolidation. To find a lender that issues SBA loans, visit the SBA’s website.

Alternative lenders

If you can’t get funding the traditional way, you can look at alternative methods, like peer-to-peer lending companies. Companies like LendingClub and Funding Circle are geared toward borrowers who need cash but might not have an established operating history to prove that they’re worthy.

FAQs about business debt consolidation

Will debt consolidation hurt my credit score?

Depending on how you use your debt consolidation loan, it could either hurt or improve your credit score. Consolidating your debt can lower your credit utilization rate as well as diversify your credit history. Simplifying your payments could also make it easier for you to make payments on time. On the other hand, you’d need to avoid using up the credit that would be freed up on your other accounts. Adding a new line of credit can also temporarily lower your credit score.

What qualifications do I need for business debt consolidation?

In order to qualify you for a business debt consolidation loan, lenders will at the following factors:

  • Your credit history and score.
  • Whether you’re a financially stable candidate.
  • Proof of your income to show you can pay the loan off.
  • Whether you have collateral, such as a house or vehicle

The bottom line

Business debt, especially from multiple sources, can be overwhelming. If you’re suffering, you may want to consider business debt consolidation.

There are a few methods to choose from, and the best for you depends on your company’s maturity and needs. Before you begin applying, make sure you review all your options to make sure that a business debt consolidation loan is right for you.

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Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
Edited by
Associate loans editor