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- You can consolidate business debt by getting one business loan, then using it to pay off all of your other existing debts
- A business debt consolidation loan makes sense when it comes with a lower interest rate or more favorable repayment term than your existing debts
- The terms of your consolidation business loan depend on your business’s financial profile
- If you want to consolidate business debt, it pays to compare options from multiple lenders to ensure you’re choosing the best loan for your business
If you have multiple business loans, you may be a good candidate for business debt consolidation. When you consolidate business debt, you replace your existing loans with a single loan. A business debt consolidation loan can provide lower monthly payments, shorten your repayment term or both.
Business owners who have loans with higher interest rates stand to save the most by consolidating business debt into one loan. But this may not be the best option for every small business owner. Not all consolidations will save on interest, offer better rates or resolve cash flow issues.
Plus, not all lenders will be a good fit. Newer businesses and those who don’t have a strong credit history may find an online lender offers better options. But established businesses with a strong history may get the best rates and longest repayment terms from traditional banks.
Here’s a closer look at how a small business loan can help you consolidate your business debt.
How business debt consolidation works
Business debt consolidation is when you take out a new business 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. It allows you to streamline your debt into one manageable payment. Your consolidation business loan can provide a longer repayment period, a lower interest rate or both.
If you don’t see either benefit when searching for a business debt consolidation loan, it may not be in your best interest to consolidate.
How to consolidate business debt
While every lender will have different business loan 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:
Calculate how much debt you owe
The first step to consolidate business debt is to calculate the total debt you owe. You can do this by adding up your payoff balances for all your loans to get a total amount.
Then use a business loan calculator to see how much of a business loan you can afford. This will show you the total loan amount you can afford, your monthly payments and how much interest you’re likely to pay over the life of the loan.
Check your credit score
Lenders will look at your personal and business credit scores and credit reports to help determine your eligibility for a loan.
The higher your credit scores, the easier it will be to get an affordable business loan. For the best rates, you’ll want to have a personal credit score of 650 or higher. But there are bad credit business loans for business owners with poor credit. And some business owners may be able to get a business loan after bankruptcy.
Explore business debt consolidation options
There are multiple business debt consolidation options available. Here are a few types of business loans to consider:
- Bank loans. Traditional banks and credit unions are the most well-known options to get a business debt consolidation loan and often offer the most favorable loan terms. To be eligible, you usually need to be in business for two or more years and have a positive cash flow and a strong credit history.
- SBA loans. The U.S. Small Business Administration (SBA) offers low-interest loans for small businesses in financial need. There are several types of SBA small business loans, including SBA 7(a) loans and microloans.
- Alternative loans. If you can’t get a traditional loan and don’t qualify for an SBA loan, alternative lenders are known for relaxed eligibility requirements and fast funding. Types of alternative lenders include online lenders, crowdfunding platforms, direct private lenders and peer-to-peer lenders.
- Business line of credit. With a business line of credit, you get access to funds quickly and only pay interest on the amount you use. As you pay down the balance, you gain more available credit to use.
- Business credit card balance transfer. If you have a business credit card and qualify for a 0% introductory balance transfer APR, this option may be a way to reduce business debts. Rather than consolidate through a loan, you’d transfer the loan balances to the credit card. This option should only be used if you can repay the entire balance before the introductory period is over. If not, interest charges kick in and could put you right back into debt.
Compare business debt lenders
Not all lenders are equal, and comparing them can help you identify which lender will offer the best business debt consolidation loan. When it’s time to get a business loan, compare lenders to see which one has the best options.
You’ll want to look at more than the loan amount and interest rates. Compare additional fees, repayment terms and any other additional costs.
If you prefer to make payments online, you may want a tech-savvy bank or online lender. But if you’d rather make payments in person or through the mail, a credit union or traditional bank may be a better choice.
Gather documentation and other information
Once you’ve selected a lender, it’s time to gather your documentation and other information to prepare for the next step. The types of documents you need as you consolidate business debt can vary by lender, but expect to provide:
- Personal documentation about other income sources, background and finances.
- A business plan, including how you plan to repay the loan and allocate funds to boost revenue.
- Proof of business ownership and status, insurance, licensing and legal documentation.
- Two years of tax returns, profit and loss statements, bank statements and cash flow projections.
- Payroll records.
Apply for the loan
Now you’re ready to apply for the consolidation business loan. Being prepared from the previous steps will make this step easier. Most lenders offer an online application, which may only require minimal paperwork in the beginning.
Once you submit the application, the lender will review it and contact you to discuss eligibility and further paperwork requirements. Depending on the lender you choose, it can take minutes or days to get a decision. Following up, especially with an SBA loan application, may be necessary to ensure the lender has what it needs to make a decision.
Close the deal
After the lender has approved your application, it’s time to close the deal. Make sure the interest rate and repayment terms are more favorable than what your current loans offer.
You’ll either meet with the lender in person or sign the loan documents online. Before signing, make sure you read the documents carefully and thoroughly so you understand the lender’s expectations, any charges or penalties you could be assessed and the process of paying off your outstanding loans with the business debt consolidation loan.
Once funds have been deposited in your business checking account, you’ll pay off your existing debts or your lender may do this for you. You’ll then begin making payments on your new loan.
Pros and cons of consolidating business debt
So is a business debt consolidation loan worth it? This method may be a good option if you want to streamline your payments, but you should be aware of the advantages and disadvantages before applying to consolidate business debt.
- Faster debt repayment. Depending on your repayment terms, you could end up with a lower monthly payment. You can take the difference from what you were paying on multiple loans and apply to the single consolidation loan to repay it faster. The sooner you pay it off, the more interest you’ll save.
- More manageable payments. When you consolidate all your business debt into one loan, it can provide a lower monthly payment and make the debt more manageable since you no longer have to keep track of multiple payments and due dates.
- Improved cash flow. If you score a lower interest rate, this can help you save money that 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 as long as your lender reports your on-time payments to one or more credit bureaus.
- 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. If you can’t secure a lower interest rate, business debt consolidation might not be worth it.
- Paying more interest over time. Your repayment terms might mean a lower monthly payment, but it could create a longer repayment schedule, which might lead to paying more interest over the life of the loan.
- Your cash flow issues might not get resolved. If you already have cash flow issues, consolidating your business debt probably won’t resolve them. Addressing your business expenses and revenue, creating ways to improve sales or working with a financial advisor may be better solutions to improving your cash flow problems.
Alternatives to business debt consolidation
If the cons of a business debt consolidation loan outweigh the pros — or you simply can’t qualify for this type of business loan — you can look into alternative debt relief strategies.
Business loan refinance
Your current lender or another lender may offer you the option to refinance your business loan. If refinancing any of your debt — particularly loans with a large outstanding balance — could help you get a lower interest rate, it might be worth the refi fees.
Restructure your business debt
You can also contact your lender and inform them you’re struggling to make payments. Some lenders will offer debt restructuring, which means they modify the terms of your loan. This could mean deferring a payment or several, extending your loan term or otherwise adjusting the loan to better work for you.
Ultimately, lenders don’t want you to default on your loan (repeatedly miss payments). Recouping their losses at that point is a costly headache for them. As a result, some business lenders will restructure debt to help companies make it through financially challenging seasons.
Most personal loans can be used for any purpose, including to consolidate business debt. You won’t be able to deduct interest rates come tax season like you would with business loan interest rates. But if you can’t qualify for a low-interest business loan, a personal loan may be an option.
Some lenders like Upstart have relaxed eligibility requirements. Plus, maximum interest rates on personal loans can be much lower than maximum rates on business loans, especially if you have bad credit. This is especially helpful if you have a lot of high-interest debt from business loans.
If you can’t qualify for a business debt consolidation loan, you may need more time to build business credit. Make sure to avoid negative marks on your credit report: Pay your bills on time and keep your debt to a minimum compared to your available credit.
The bottom line
There are risks to taking out a business loan, including not being able to make your monthly payments and defaulting on the loan. Business debt consolidation may improve your cash flow, provide more manageable payments, boost your credit or help you repay your debt faster. But it’s not a cure-all for existing financial problems, might not land you a better interest rate and could increase the amount of interest you pay.
If the pros outweigh the cons, it may be worth taking the steps to consolidate business debt. Depending on your business’s financial and credit history, plus the amount you owe, you could have multiple options. There are traditional lenders, online solutions, SBA loans and even credit card balance transfers to consider.
Frequently asked questions
Debt consolidation loans can be worth it if you can get a better interest rate or longer repayment term. But if you can’t get either, it may not be worth it. Keep in mind, a longer repayment period could mean you end up paying more interest over the life of the loan. And if you’re experiencing cash flow issues, it might not provide the money you expect.
Yes, you can use a business loan to consolidate debt, as long as it’s business debt. You can secure a business loan through an online lender, a traditional banking institution or through the Small Business Administration (SBA). Once you get the funding, use it to pay off your existing business debt.
If you’re looking to get out of business debt fast, there are a few things you can do. Take inventory of your debts to see which ones make the most sense to tackle first — usually the debts with the highest interest rates. Another option is to refinance or consolidate high-cost debts, like ones with variable or high interest rates. You can also look for ways to boost sales, like implementing loyalty rewards, engaging on social media or raising prices. Cutting costs by selling off equipment you no longer use, downsizing or splitting costs by sharing resources with other companies can also help you get out of business debt faster.
Business debt can be written off if the debt is considered worthless after incurring a business-related debt and previously included as income. Business bad debts include business loan guarantees, customer credit sales and client, supplier, distributor or employee loans.
The difference between debt consolidation and debt refinancing is the number of loans you’re replacing. With debt consolidations, you’re taking multiple loans and consolidating them into one loan. But with debt refinancing, you’re taking out one loan to replace it with another. Either option may be beneficial if it offers better repayment terms, a lower interest rate or both.