Business Debt Consolidation: Is it Right for Your Business?

Let’s face it: Juggling multiple loan or credit payments can be a burden. But if bootstrapping your business isn’t an option, it might be necessary to make your entrepreneurial dream come true. One way to limit multiple monthly payments is through business debt consolidation.

But before you start daydreaming about what consolidation can do for your business, consider whether it’s the right move for your situation. Ready to get started? 

What is debt consolidation in business? 

Small business debt consolidation is the process of combining multiple, smaller loans into one large loan. The large loan pays off the small loans. If you consolidate your loans into one, you only need to make one loan payment each period.

Consolidating your loans can help you:

  • Better manage your debt and cash flow
  • Reduce your interest rate
  • Lower your monthly payment
  • Increase your repayment terms
  • Improve your credit score
  • Give you breathing room to borrow more money
  • Simplify your monthly bills and avoid missing payments 

But if you think business debt consolidation can fix all your cash flow problems, you may need to think again. Consolidation only combines your debt into a bit of debt—it does not eliminate this liability in business

Debt consolidation is one form of business debt relief. But, it isn’t the only form. You can also refinance business debt.  

Business debt consolidation loan vs. refinancing 

Do you think consolidation and refinancing are one and the same? If so, you’re not alone. A number of people intermix the two terms, but there is a key difference.

Refinancing business debt is the process of taking out a new loan with lower interest rates and payment amounts to replace a current loan. Refinancing does not consolidate multiple loans into one. 

Let’s say you have one loan, Loan A, which has an interest rate of 4%. You have the opportunity to lower your interest rate to 2.5% by taking out a new loan. This is refinancing.

On the other hand, let’s say you have three loans, Loan A, Loan B, and Loan C. You want to combine them into one loan so you only have one monthly payment. This is consolidation. 

Is business debt consolidation right for you?

Before consolidating your loans, you need to assess whether it is the right decision for your circumstances.

Consider your:

  1. Time in business 
  2. Credit score
  3. Current loans
  4. New loan terms

to determine if business debt consolidation is right for you, consider: 1) Time in business 2) Credit score 3) Current loans 4) New loan terms

1. Time in business

First, consider how long you’ve been in business. You might qualify for better loan opportunities now than when you first started. If your business has grown substantially since you obtained the original loans, consolidation might be a good decision for you. 

The longer you’ve been in business, the more appealing your consolidation request looks to lenders. Not to mention, you may qualify to apply for an SBA loan as you become more established. 

Long story short, if you’ve been in business a while, you could wind up with better loan terms, like a lower interest rate. 

2. Credit score

How’s your personal credit score looking? What about your business credit? If these have improved since you originally took out loans, you might be a good candidate for a business consolidation loan. 

Improved credit scores show lenders that you’re capable of making timely payments, meaning you could get a better interest rate on a new loan.

Keep in mind that debt consolidation can either help or hurt your credit score:

Hurt: You may see a short-term decrease in your score as a result of:

  • Lender inquiry
  • New debt 
  • Lowered average account age 

Help: In the long-term, consolidating your debts could give your credit score the boost you want due to:

  • Lower credit utilization ratios
  • On-time payments

Keep in mind that debt consolidation doesn’t always help in the long-term. If you take out a new loan and continue to run up your credit cards, you may struggle to improve or maintain your score. 

3. Current loans

For some, a business debt consolidation loan isn’t the right choice. If you’re close to paying off one or more of your current loans, consider holding off on consolidating. 

Going through the consolidation process for a loan that is almost paid off can be more difficult, and you may lose money on interest.

Alert! When you’re looking at your current loans, make sure you’re only looking to consolidate your business debts. Don’t bring personal debts into the mix. Consolidating personal and business debts under one new small business debt consolidation loan could be a recordkeeping, cash flow management, and reporting nightmare. 

4. New loan terms 

So, you’ve applied for consolidation and gotten your new loan terms and conditions, such as the:

  • Interest rate
  • Loan term (i.e., how long it’ll take to pay off)
  • Monthly payment amount
  • Collateral (if applicable)

Depending on the loan terms, you may be able to pay off your debts faster. On the other hand, a bad loan could make it more difficult to get out of debt. 

Applying for a business debt consolidation loan 

Decided to consolidate? If so, it’s time to apply for a small business debt consolidation loan. 

First, determine which debts you want to consolidate. Do you have small business loans, credit cards, or both? Do you want to consolidate all your business debt or just some of your loans? For example, if you have five loans but one of them is almost paid off, you might choose to consolidate the other four loans.

Next, examine the terms of your current loans. You might need to pay more in early payoff fees when consolidating. If it will cost you substantially more to consolidate, you might want to reconsider.

Determine which lender you would like to use for the consolidation process. For options specific to small companies, you might look into Small Business Administration loans.

Once you’re ready to apply, gather and organize your documents. We’re talking things like your:

  • Financial statements
  • Accounting records
  • Taxpayer identification number (TIN)
  • Income
  • Current loan balance

After you have all your ducks in a row, it’s consolidation go-time.

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This is not intended as legal advice; for more information, please click here.

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