What Is Business Debt Consolidation and Is it Right for You?

Published: Jun 4, 2020 Last Updated: Dec 23, 2021 by Lisa Price In Small Business Finance 1

Having multiple loans complicates business bookkeeping. Multiple loans may also impact business cash flow during the month.

Should you consider business debt consolidation? Absolutely. Even if you’re easily managing multiple loans and cash flow, you might save money through debt consolidation.

An investigation into small business debt consolidation that helps you save money? Sounds like a good idea. Let’s take a look.

What is Debt Consolidation?

Let’s get the simple definition out of the way. Debt consolidation is when you take multiple loans, including fixed loans and lines of credit, and combine the debt into one loan.

Can You Consolidate Business Debt?

As you took on the trappings of adult life, you accumulated financial responsibility. You got a mortgage, a car payment and credit card. Well, or credit cards.

At some point you thought, wait a second. My mortgage rate is good, but my credit card interest rate is ridiculous. My car payment interest rate falls somewhere in between. Hey, if I got a home equity loan I could pay off the car and credit card, with a lower interest rate.

Debt consolidation is not just for consumers – businesses can make use of the approach as well. You most likely have a business credit card. You may have taken on additional business debt as needed, to purchase equipment or inventory. And perhaps you may have done this using a series of business loans as you grew the company.

Should you consider business debt consolidation?

Pros and Cons of Debt Consolidation

Every debt consolidation has its Pros and Cons. The Pros and Cons for every debt consolidation vary by the status of the small business seeking the loan. In other words, each small business has a unique financial operation that affects its fit for debt consolidation.

Here are factors that will carry weight on any business owners’ decision.

Pros of Business Debt Consolidation

Lower loan payment amount each month – you’ll have a longer loan term. Spreading out the payments will make the monthly payment lower.
Lower interest rate – Shop around. Business debt consolidation doesn’t make any sense unless you get a lower interest rate.
Helps on other loan applications – Banks and other lending institutions don’t like to see a list of multiple creditors. If you’re seeking a separate loan, consolidating your existing loans into one may help you get that other new loan.
Business expansion – At the same time you do your business debt consolidation, you can borrow more to cover the cost of growing your business. You can use the funds to buy equipment or supplies.
Aids cash flow – When you do a business debt consolidation, you can pick the loan due date. You can choose that date based on the monthly schedule of your business earnings.
Simplifies status and payback of business debt – It’s much easier to keep track of one loan. You’ll know when that loan is due. That makes it easier to coordinate your small business earnings with debt repayment.

Cons of Business Debt Consolidation

Longer term – Do you have a home mortgage? Did you find it disheartening to compare the home purchase price with the actual loan repayment amount? Yep. Having lower monthly payments on debt consolidations can be a Pro and a Con. The actual repayment amount will be much higher than the loan amount. But don’t forget you can negate that con by throwing all the money you can at the principal.
Fees for new loan – The loan application and approval process may include various fees and costs. You can often include those fees in the new loan.
Interest rate – Depending on the type and rates on loans you have now, you may not find better interest rates. Play with the numbers. Does it make sense to do a business debt consolidation to get an interest rate that is 1% lower? 2%? You can play with loan amounts and interest rates on websites such as bankrate.com.
Overall debt amount – due to fees and costs, your overall amount of business debt may increase.

Should I Consolidate My Business Debt?

Is this the right time for you to do a business debt consolidation? Here’s a checklist of considerations:

You Qualify – As you grew your business, you may have taken out a series of small loans. Now you’ve been in business for a few years. Because of your proven business record, you may now qualify for a business loan that you couldn’t get then.

Interest rates – The new loan should have a lower interest rate. Calculate the rate you seek by finding the average of the interest rates you have on loans now. The debt consolidation loan should have the same or lower interest than the average of your current loans.

Repayment Amounts – Add up the payment amounts for your current loans. The debt consolidation monthly repayment amount should be less than this total.

Timing of Payments – Covering a series of monthly payments with various due dates can be a juggling act. Having one business debt consolidation loan payment can free up working cash during the month.

Cost Associated with New Loan – There may be various loan origination fees and other associated costs for new loans.

Length of New Loan – There’s a tradeoff for a lower monthly payment when you combine numerous loans into one loan. The tradeoff for business debt consolidation is a longer time period on the new loan.

Early Payoff Option – Small business owners by nature are good at self-discipline. Make those scheduled business debt loans. And pay against chunks of the principal whenever you can. Few people are comfortable with a lot of debt. You can allay that discomfort by combining scheduled loan payments with payments targeting the loan principal.

How to Consolidate Business Debt

If you want to consolidate your business debt, here are the steps to follow:

Step 1: Make a list of all your current loans. Include the payment amounts, loan amounts, interest rates and length of term. Calculate the average annual interest rates. Add up the totals for your loan amounts and payment amounts.

Step 2: Add details for each existing loan. How is each existing loan set up? Is there a penalty if you pay it off early? If so, you have 2 choices – calculate the early repayment penalty and include it in the debt consolidation loan amount. Or, don’t include loans that have early repayment penalties.

Step 3: Find out about any repayment penalties. As you research the options for consolidating debts, make note of which options don’t include early repayment penalties. Being able to apply extra monies to the principal loan amount can be a huge benefit that negates the increased loan length.

Step 4: Explore Loan Options. Your small business is unique, and there will be a loan and a lender that are your best fit.

Step 5: Compare APRs. The interest rate and the annual percentage rate are like cousins, twice-removed. The interest rate is a number applied to the loan amount and repayment terms. It’s easy to calculate a payment amount using solely the interest rate.

The second cousin APR is different. It’s the interest rate plus any annual fees. The APR is the real number. Your goal is to get a better APR than you currently have with the existing loans.

Business Debt Consolidation Options

The Small Business Administration is a great starting point for your venture into small business debt consolidation. It’s easy to find a bank that participates in the SBA lending program. The bank you currently use may be a participant. You can find a list via the SBA website.

You can apply for a traditional bank loan, or investigate the debt consolidation options available through alternative lenders.

Small Business Association Loans

Small business debt goes hand-in-hand with business growth. The SBA has decades of experience with the ups and downs, and needs, of small business owners.

The SBA offers traditional term loans as well as lines of credit loans. There are loans specifically for seasonal businesses. Loans aimed at benefiting minority business owners, including women. And loans specifically for aiding Veterans.

For more information, take a look here:

Bank Loans

Most banks and credit unions offer a debt consolidation loan. Is it the same as a Refinance? Not exactly.

A refinance loan can be a debt consolidation. Here’s how:

A refinance loan – That’s a refi of an existing loan. The refi is done to get a better interest rate on the loan amount. A debt consolidation loan combines the amounts owed on various loans into one loan.

When you refinance, you can often do so and add consolidated debts. This is more likely if you have a good credit score and a squeaky clean repayment record. The bank or credit union has already been getting your money, plus interest. The bank or credit union would like to get the money and interest you’ve been paying other lenders (again, with a great repayment record).

Options for consolidating small business debt include numerous loan options, including traditional term loans.

Alternative Lenders

You may also be able to get a debt consolidation loan based on the type of business revenue you generate.

For example, there’s a loan option called Invoice Financing. As it sounds, you borrow money based on the amount of money you’ll get when invoices are paid to you. This isn’t based on estimated invoices; it is based on amounts that have been invoiced and have due dates.

There are various online lending platforms. Many are set up to provide working capital during specific times, such as seasonal businesses tied to construction and building. There are online lenders that specialize in small business debt consolidation.

Funding Circle

Funding Circle is a global, small business loan platform that connects small business owners with investors. It launched in the UK in 2010 and has been in the US since 2013.

Unlike other online lenders, Funding Circle solely offers small business loans. Since its launch, the global loans platform has tendered nearly $12 billion to 81,000 businesses.

Don’t have time to shop around for small business debt consolidation? Funding Circle applications are completed online.

Funding Circle as a lending and securities operation subject to individual state laws, as well as regulations of the Securities and Exchange Commission and the Federal Trade Commission.

Business Debt Consolidation FAQ

We answer the most frequently asked questions business owners have about business debt consolidation below.

Is Business Debt Consolidation the Same as Refinancing?

Technically, it’s not the same. A refinancing by definition is taking one existing loan debt and redoing it, to get a lower interest rate.

A business debt consolidation takes a number of loans and combines them into one debt. However, it is possible when doing a refi of existing debt to add other existing debts to the new obligation. In fact, a lender may like that. A lender has a choice – get your money plus interest from one loan, or get your money plus interest from a number of loans (that other lenders are currently collecting).

Does Debt Consolidation Hurt Your Credit?

No. And it may actually help your credit. If you’re applying for a large loan, a lender doesn’t want to see a laundry list of creditors. Having one creditor is more favorable if you’re applying for another loan.

Can I Consolidate My Business Debt if I Have a Low Credit Score?

If you’re starting out with bad credit, you might have trouble finding a business consolidation loan. If you have a low credit score, you can try to secure loans via these lenders for small business loans with bad credit.

Conclusion

As a small business owner, you have a myriad of decisions to make on a daily basis. In addition to its potential for saving money, doing a debt consolidation is a form of decluttering.

Instead of having various loan payments due on various days of the month, you have one monthly payment. This can free up your working capital and make doing business more simple.

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