Business Debt Consolidation and Refinancing: An Overview for Small Business Owners

If you’re a small business owner struggling under the weight of multiple debts – we get it, it’s tough out there! Consolidating or refinancing your business loans might help ease some financial pressure. This article covers the basics of business debt consolidation and refinancing, including the pros, cons, defenses, and legal implications to consider before taking the plunge.

What is Business Debt Consolidation?

Business debt consolidation basically means rolling all your existing business debts into one new loan with one monthly payment. The goal is to simplify repayment and ideally save money on interest compared to what you currently pay across multiple debts.

A consolidation loan pays off your individual business debts like credit cards, equipment financing loans, and even some tax debts. You then owe a single lender one monthly payment on the consolidation loan.

Pros of consolidating can include:

• Simpler repayment with one monthly bill
• Potentially lower monthly payments
• Could reduce overall interest paid
• Improve cash flow with lower payments
• Build business credit with on-time payments

However, consolidation isn’t guaranteed to save money, so run the numbers carefully beforehand.

What is Business Debt Refinancing?

Refinancing replaces an existing loan with a new loan, ideally with better terms like a lower interest rate or payments. Even businesses with just one loan can benefit from refinancing if they secure a better rate or terms.

You don’t necessarily need bad credit or be behind on payments to refinance debt. Many businesses with good credit and payment history refinance to get better loan terms and free up cash.

When Does Consolidation/Refinancing Make Sense?

• If you qualify for a lower rate on a consolidation loan
• To reduce monthly payments freeing up cash flow
• To move from variable to fixed rate financing
• Extend length of loan to reduce payments
• Consolidate multiple near-term debts into one longer-term loan

Run the numbers to see if consolidation saves money over keeping existing debts. Shop rates from multiple online lenders and banks.

What are the Cons of Consolidating or Refinancing?

Consolidation doesn’t erase debt – you still owe money, just to one lender instead of many. It can cost money to consolidate debt too. Watch for:

• Balance transfer fees
• Prepayment penalties on existing loans
• Upfront loan origination fees
• Higher rate than current debts
• Losing deductible interest
• Extending the loan term

Basically shop carefully! Crunch numbers to see if it saves money over current debts.

What Defenses Should I Consider?

Consolidating or refinancing debt is a big decision, so consult a lawyer or accountant beforehand if possible. Some key legal considerations:

Read the Fine Print!

Comb through loan terms for gotchas like:

• Prepayment penalties
• Balloon payments
• Variable rates
• Rate hikes after intro period

Pick Your Asset Protection Carefully

How new lenders secure loans varies. Common options include:

• Blanket business assets
• Accounts receivable
• Cash collateral
• Personal guarantee from owner

See what makes sense for your situation. For example, tying up cash collateral could hurt cash flow.

Consider Insurance Impacts

Will refinancing equipment or vehicles drop crucial coverage? Before consolidating:

• Review existing insurance policies
• Ask lenders about requirements
• Shop brokers for best rates

Which Lenders Should I Consider?

Most major banks offer some form of small business lending, however online lenders like LendingClub, OnDeck, and Fundbox specialize in quick, online loan decisions.

Banks probably offer the lowest rates, but can have stringent approval requirements. Online lenders typically offer faster decisions and approvals, but sometimes have higher rates or aggressive terms.

Weigh options from both types of lenders – it comes down to your business financials, timeline, and uses for the loan.

Does Consolidating Debt Affect Your Credit?

Opening new credit always causes a temporary hit to your scores. However, over time responsibly managing consolidated payments can actually improve your credit.

On-time payments show lenders you can handle debt. Multiple open accounts in good standing build your business credit file.

Just avoid closing old accounts right away if possible – that loses your credit history and hurts scores.

Other Alternatives to Consider

If consolidation loans don’t offer terms to save money, consider:

• Renegotiating existing debt terms
• Opening a business line of credit
• Working with lenders on modified payment plans
• Finding an investor to buy out debts

Every business situation differs – shop options and get advice from other small business owners in your community too. With some diligence, you can find the right debt solution to stabilize things.

We know how stressful debt can be for business owners. Hopefully this article helps in considering whether consolidation or refinancing business loans could provide some financial breathing room. Reach out with any other questions!