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Updated: November 18th, 2020
Business debt consolidation may be something worth considering if you’re carrying multiple business loans. Consolidating business debt is a way to streamline your debt repayment into a single monthly payment, ideally at a lower interest rate. It can make repaying business debt more manageable, and potentially, more affordable — especially if you’re looking to consolidate high interest forms of financing like credit cards, lines of credit or merchant cash advances.
But is a business debt consolidation loan the right move for your business? And how does it actually work? Dive in to learn the answers to those questions and more about business debt consolidation.
Consolidating small business debts isn’t that different from consolidating other types of debt. The process works something like this:
Of course, there’s a little more to it than that. For instance, you’ll need to research lenders and business debt consolidation loan options to find the best terms. And you’ll need to check your credit profile to determine which loans you may have the best chance of qualifying for. It’s also important to understand that consolidating business debt isn’t the same as refinancing it.
Business consolidation and debt refinancing get grouped together but they’re not identical. When you consolidate small business debt, you’re getting one new loan to pay off two or more existing loans. The interest rate you pay may or may not be lower than the average rate you’re paying for your loans currently.
Refinancing small business debt also involves getting a new loan but there are two things that set it apart from a business consolidation loan:
The purpose of small business debt consolidation is to combine multiple loan payments into one to make repayment more manageable. Getting a reduced rate or payment is an added benefit.
It might be the right time for you to consolidate your business debt, but then again, it might not. That’s why it’s important to take into account a variety of factors before applying for a business consolidation loan. Improvements in the following areas could result in a reduced rate, longer repayment terms, and a better chance of approval:
A good way to answer this question is to weigh the pros of small business debt consolidation against the cons.
Let’s start with the pros:
The higher your rate, the more you’ll pay in interest over the life of the loan. If you’re able to lower your interest rate by consolidating, that could save your business money. When a lower rate also lowers your monthly payment, you could take those savings and put them directly back into your business to cover everyday expenses or to fund your next growth project.
Time is one of the most important resources for small business owners and trying to manage multiple monthly payments can be a headache. A business consolidation loan can eliminate some of that stress by whittling down multiple bills, due dates and interest rates into a single repayment.
Business credit scores are based on a few different factors, and payment history is a big one. When lenders and vendors or suppliers see that you have a positive track record of paying off debts on time, they may be more likely to lend to you in the future. The likelihood of having a late or missed payment goes down with business debt consolidation because you only have one payment to worry about, versus several.
Now, let’s consider the cons:
The interest rate you’ll pay for a business consolidation loan depends on several things: your creditworthiness, how much you’re borrowing, your business history, the type of loan and the lender. So while you may be able to combine multiple loans into one, the rate you end up with may not be lower, or even the same as what you were paying before you consolidated.
When you consolidate into a new business loan, one thing to pay attention to is the loan term. If you extend the loan term to get a lower payment, it’s going to take you longer to pay off the debt. Not to mention, you might end up paying more in interest charges over the long term compared to what you might have paid if you hadn’t consolidated.
Getting a new business consolidation loan to free up cash may be a band-aid for cash flow problems, not a permanent solution. If your expenses seem to keep going up while revenues flatline or decrease, you may end up taking on new debt to keep the business going, potentially leaving you worse off financially.
There’s more than one way to consolidate small business debt. Knowing the different loan options available can help you narrow down which type of loan is best. Here are three options for finding small business debt consolidation loans:
Your bank may be the first place you look for a business consolidation loan. Financial institutions like banks and credit unions can offer consolidation loans at competitive interest rates, with repayment terms that may stretch up to 10 years. If you’ve always maintained a good business and/or personal banking relationship with a particular financial institution, that may open you up to qualify for discounts or reduced fees on a small business business debt consolidation loan.
Bank loans, however, can sometimes be difficult to qualify for. Banks generally prefer to lend to businesses that have multiple years of operating history under their belts, solid revenues and of course, you’ll most likely need great credit scores to get approved.
The SBA offers several loan programs for business owners, including 7(a) loans, which can be used for debt consolidation. With a 7(a) loan, it’s possible to borrow up to $5 million for small business funding needs.
Like bank loans, SBA loans tend to offer competitive rates. And while they’re geared towards established small businesses with strong revenue and credit, newer businesses or those with less-than-perfect credit may be able to get a business consolidation loan through a few of the programs.
A third option is to go online to look for a business consolidation loan from an alternative lender. Online lenders can offer competitive rates and terms and, you may be able to borrow up to $500,000 for debt consolidation — a sizeable chunk of cash. Most often, online lenders offer term loans for small business debt consolidation, with terms typically extending up to five years.
If you’re ready to consolidate business debt, it helps to know exactly what steps to take. Here’s a simple checklist you can follow as you navigate the process:
First things first, think about what you hope to accomplish from business debt consolidation. Do you want to get a lower rate or a lower payment so you have additional cash on hand? Or do you just need to consolidate so you have fewer bills to manage? Knowing the motivation for consolidating can help when it’s time to choose a loan.
Review your existing business debts, including loans, credit cards and lines of credit. Take note of the amount owed, interest rate and repayment term. Add up the total amount of debt your business owes.
After you’ve listed your debts, take a second look to decide which ones to consolidate. This is where knowing your goals for business debt consolidation comes in handy. If you want to get a better rate, for example, you may focus on consolidating just those debts that have the highest APRs. If you need more cash on hand, you may want to consolidate debts with the shortest terms and biggest payments. Or, maybe, you just want to consolidate all of your business debt into one, single monthly payment to simplify your life.
Before pursuing any business debt consolidation loans, read the fine print on your existing loan agreements. If your lender imposes a prepayment penalty for paying off your loan early, you’ll need to account for that when deciding how much to borrow.
Next, think about which lending option makes the most sense, based on how likely you are to qualify for a loan. If you have strong credit and great business financials, for instance, then your bank may yield the best loan terms. On the other hand, you may prefer an online lender if you’re looking for a simple application process and fast funding. Depending on the lender, getting a business consolidation loan online could mean funding in as little as a few business days.
As you vet different lenders, compare individual business debt consolidation loan terms. Get familiar with the annual percentage rate and loan fees, as well as the repayment terms. Consider using a loan repayment calculator to run different APR and loan term scenarios to get an estimate of your monthly payment and the total interest you’ll pay.
Before applying for a business consolidation loan, get your documentation ducks in a row. Be prepared to offer the lender copies of your tax returns for the last two years, along with bank statements, key financial statements, your personal (and business) credit report, and a copy of your business plan. Having all the relevant paperwork ready to go can speed up the application and approval process.
Fill out the lender’s application and submit any supporting documentation that’s required. Check your application twice to make sure you haven’t left out any key information. From there, you can wait for an approval decision, then give the lender your bank account information for loan funding.
Once your business debt consolidation loan is funded, you can use the money to pay off your other loans. Ask your original lenders for a correct payoff amount to account for any interest or finance charges that might have accrued since you applied for a business consolidation loan. And get confirmation from the lender that the loan is paid in full and the balance is zero. It’s also a good idea to check your credit reports a month or so after paying off the loan to make sure the account history has been updated to reflect the payment.
When consolidating business debt, it helps to work with a lender that understands your needs and your business.
Funding Circle offers up to $500,000 in term loan funding for small business debt consolidation, with terms ranging from six months to five years and fixed, competitive interest rates.
Our repayment schedule is predictable – just a consistent, once-monthly payment over the life of your loan.
We also pair every business owner with an account manager to walk you through our entire process, answer all of your questions in a timely manner, and to help you make the best decision for your business. We’ll work with you to size your monthly payment plan, and help you decide what monthly repayments best suit your needs.
If you’re ready to consolidate your small business debt, Funding Circle is ready to help. Take 60 seconds to check your eligibility for a Funding Circle term business loan today!
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Louis DeNicola is the president of LD Money Media LLC and an experienced finance writer who specializes in credit, personal finance, and small business finance. Within the small business sphere, he helps business owners understand their financing options, cash flow management, business credit, and taxes. In addition to Funding Circle, you can find his work on BlueVine, Credit Karma, Experian, Wirecutter, and Lending Tree.