Business Debt Consolidation Loans and Refinancing – What the Data Shows

Small businesses have been hit hard by the pandemic. Many have taken on additional debt just to stay afloat. Now, as the economy recovers, business owners are looking for ways to get their debt under control. For some, debt consolidation loans and business loan refinancing are attractive options. But what do the data and statistics show about these debt relief strategies?

Debt Consolidation Loan Volume on the Rise

According to Forbes, the volume of personal loans for debt consolidation purposes has risen dramatically in recent years. In 2018, only 29% of personal loans were used for consolidation. By 2021, that number jumped to 49% – nearly half of all personal loans.

The trend is similar for small business loans. Data from Funding Circle shows that debt consolidation and refinancing loans now make up around 20% of their small business loan volume. That’s up from just 3% in 2018.

Clearly, debt consolidation strategies are gaining popularity for both consumers and business owners. The ongoing economic uncertainty is likely fueling this trend.

Top Reasons for Debt Consolidation

For small businesses specifically, the top reasons for pursuing a debt consolidation loan include:

• Lower interest rates – By consolidating high-interest debts into one new loan at a lower rate, monthly payments go down.
• Simplify payments – Rather than tracking multiple loan payments, there is just one monthly payment to manage.
• Improve cash flow – Lower monthly payments free up cash that can be reinvested in the business.
• Pay off debt faster – Shorter loan terms allow businesses to become debt-free quicker.
• Improve credit – Getting a handle on debt can boost business credit scores.

Average Loan Size and Terms

The average small business debt consolidation loan amount is around $50,000 according to CNBC. However, loans can range from as little as $1,000 up to $100,000 or more.

Typical repayment terms are 1-5 years. Shorter terms of 1-3 years are common for debt consolidation loans. This allows the debt to be repaid quickly, often at a lower interest rate.

Interest Rates and Qualifying Criteria

Interest rates on debt consolidation loans for small businesses average around 7-12% according to Swoop Funding. Rates vary based on the lender, loan amount, credit score, and other factors. In general, applicants with good credit (660+ score) qualify for the lowest rates.

To qualify for a small business debt consolidation loan, lenders look at factors like:

• Time in business – 2+ years is often required
• Annual revenue – Minimum of $250k – $500k
• Credit score – Minimum score of 600-650
• Debt-to-income ratio – Lower is better
• Collateral – Some lenders require collateral like equipment, accounts receivable, etc.

Meeting these criteria improves the chances of loan approval and securing a low interest rate.

Refinancing Volume Also on the Rise

Along with debt consolidation loans, refinancing of existing small business loans is on the rise. According to Forbes, 18.6% of small business loan applications are for refinancing existing debt.

Refinancing is attractive when interest rates drop, allowing businesses to reduce interest costs on current loans. Streamlining multiple loans into a single loan also simplifies monthly payments.

The refinancing process is similar to obtaining a new loan. The business must re-qualify by submitting updated financial documentation. Good credit and strong revenue are key to securing the best refinancing rates.

The Pros and Cons of Debt Consolidation

While popular, debt consolidation loans are not necessarily the right solution for every business. Some key pros and cons include:

Pros

• Lower monthly payments
• Lower interest costs
• Simplify payment tracking
• Improve cash flow
• May improve credit score

Cons

• Closing costs and fees
• Risk of taking on more debt
• Temptation to overspend if payments decrease
• Potential prepayment penalties
• Negative impact on credit score if additional debt is taken on

Assessing the specific business situation is important before pursuing either debt consolidation or refinancing. Speaking with a finance advisor or accountant can provide an objective view.

Expert Tips for Managing Business Debt

Here are a few tips from finance experts for managing business debt:

• Track expenses – Use accounting software or spreadsheets to monitor where money is going. Identify waste.
• Pay down highest interest debt first – Focus extra payments on debt with the highest interest rates.
• Negotiate with vendors – See if they can offer better rates or payment plans.
• Only take on new debt if absolutely needed – Don’t dig the hole deeper.
• Explore gov’t programs – Federal and local programs exist to assist small business financing.
• Consider bankruptcy – If debts are unmanageable, bankruptcy may be an option. Consult an attorney.