Business Debt Consolidation: An Overview for Small Businesses

Debt consolidation can be a helpful tool for small business owners looking to simplify finances and improve cash flow. By rolling multiple debts into one new loan, you only have to make one monthly payment instead of many. This can make organization easier and also presents opportunities to secure better loan terms. However, debt consolidation loans aren’t always the best approach and do come with some downsides to consider. This article will provide an overview of business debt consolidation to help small business owners understand their options.

What is Business Debt Consolidation?

Business debt consolidation involves taking out a new loan to pay off multiple existing business debts at once. This allows you to combine things like business credit cards, equipment financing loans, lines of credit, and more into a single loan with one monthly payment. The goal is to simplify repayment and potentially even lower interest rates.

Popular types of loans used for small business debt consolidation include:

• SBA 7(a) Loans – Government-backed small business loans offered through lenders like banks and credit unions. Maximum amounts up to $5 million.
• Term Loans – Fixed-rate installment loans with set repayment periods, offered by online lenders like Funding Circle and OnDeck.
• Lines of Credit – Revolving credit accounts allowing flexible borrowing up to a set limit, offered by banks and alternative lenders like BlueVine.
• Business Credit Cards – Balance transfer cards can be used to consolidate debt to a single account with a low introductory APR period.

Borrowers can shop and compare different business debt consolidation loans to find the best rates, terms, and fees for their specific situation. Approval is based on business and personal credit scores, revenue, expenses, collateral, and other eligibility factors.

What Are the Benefits of Debt Consolidation?

There are a few potential advantages that make debt consolidation attractive for some business owners:

1. Simplified Finances

Rather than tracking multiple loan payments, amounts owed, due dates, etc., you only have one loan payment to budget for each month. This can make organization much less complicated.

2. Lower Interest Rates

By taking out a new debt consolidation loan, you may be able to secure a lower interest rate than you currently pay across your existing debts. This saves money over the lifetime of the loan.

3. Improve Cash Flow

If you can lower your monthly debt payments through consolidation, more money is freed up to cover operating expenses and hopefully invest back into business growth.

4. Pay Off Debts Faster

Some loans allow flexible repayment options. By choosing a shorter loan term or making extra principal prepayments, you may knock out your business debt ahead of schedule.

What Are the Downsides of Debt Consolidation?

However, there are also some potential cons to weigh when considering business debt consolidation:

1. Closing Business Credit Accounts

When you pay off credit cards or lines of credit with a consolidation loan, these accounts will be closed which can impact your business credit utilization ratio and scores.

2. Loan Prepayment Penalties

If trying to pay a debt consolidation loan off early, some lenders charge fees for prepayments so check the loan contract.

3. Tax Consequences

Exchanging equity debt for loan debt may have negative tax implications. Consult an accountant to understand any tax impacts.

4. Missed Payment Risks

If the consolidated monthly payment ends up being unaffordable and you default, all collateral secured by the loan could be seized.

5. Balloon Payments

Some business loans have balloon payments required at the end, meaning your last payment due is much larger. Factor this into your repayment ability.

6. Variable Rates

The interest rate on a business debt consolidation loan may start out low but later fluctuate up which would increase payments.

What Do You Need to Qualify for a Consolidation Loan?

Lenders have specific eligibility standards and required documents for small business debt consolidation loans:

• Minimum credit scores – Often 680+ personal score and/or years in business
• Revenue – Annual gross revenue requirements, like $250k+
• Time in business – 2 years of continuous operations generally preferred
• Collateral – Asset used to secure loan, like real estate or equipment
• Financial statements – Tax returns, bank statements, profit/loss statements
• Existing debt schedules – Details on all current obligations
• Business plan – Strategies for loan repayment and business growth
• Legal documents – Business licenses, entity formation records, etc.

Meeting the above criteria makes approval more likely but does not guarantee it. Lenders review many aspects of the borrower’s finances to analyze credit risk.

How Can Small Businesses Find the Best Consolidation Loans?

Shopping around for debt consolidation loans is crucial to find the best rates and terms. Here are some tips:

• Get rate quotes from multiple SBA lenders, banks, credit unions, and online alternative lenders
• Ask about interest rates, origination fees, repayment timeline, and prepayment policies
• Read all loan terms and contracts carefully before signing anything
• Consider visiting a small business banker for personalized advice and options
• Use a loan broker to shop on your behalf if short on time
• Check business credit reports and scores first to understand how lenders view your finances
• Make sure the loan purpose – debt consolidation – is specifically allowed by the lender

The lowest rate offer isn’t necessarily the best choice overall. Weigh the entire loan package – APR, fees, risks, loan amount, collateral needs, and other factors. Getting financing from a reputable lender you trust is also important for small business owners.

What’s the Process of Consolidating Business Debt?

If you determine debt consolidation is your best path forward, here is a general overview of what to expect:

1. Check eligibility – Confirm you meet lender requirements before completing full applications.
2. Compare loan offers – Evaluate multiple pre-qualified options side-by-side.
3. Submit application – Provide all required business and personal financial documentation.
4. Get approved – If loan terms meet your needs, sign contract.
5. Secure collateral – Put up any assets like real estate to back the loan if needed.
6. Close consolidation loan – Final steps include paperwork review and bank account verification.
7. Pay off old debts – New loan proceeds distributed to each old creditor for balance payment.
8. Begin new loan repayment – Only one monthly bill going forward.

Most small business debt consolidation loans fund within a couple weeks of approval once collateral is in place, though some may close faster. If you have any questions during applications or closing, ask your loan officer for help.

Are There Alternatives to Debt Consolidation Loans?

Other than taking out a standard consolidation loan, a few options related to simplifying debt may work better depending on your situation:

• Credit counseling – Consult experts on managing current debts without new loans.
• Debt management plans – Arrange lower interest rates and payments on existing debts.
• Balance transfer credit cards – Shift balances to one card with 0% intro APR.
• Sell assets – Liquidate equipment or other holdings to pay debts.
• Renegotiate terms – Extend lengths or request lower rates on current debts.

For small businesses struggling with high debts, meeting with a financial advisor can provide direction on the wisest strategies beyond debt consolidation loans alone. There are also business debt relief programs and services available to look into as well.

The Bottom Line

Debt consolidation can be a helpful tool for qualifying small business owners wanting to take control of finances. Weigh the pros and cons carefully based on your specific situation before pursuing this path. Consolidating multiple debts into one loan can offer simplicity and potential savings, but also comes with some risk depending on the terms. Compare multiple lenders to find the best rates and always read the fine print before signing anything. With the right loan package, debt consolidation can positively reshape your business finances.