At a Glance
If you financed a business with business loans, you’re likely familiar with making different payments, with multiple due dates, varying interest rates and final balances, and even with various lenders. When you consolidate your business debt, you’ll combine your numerous loans or merchant cash advances into one loan, ideally with a lower interest rate, which would result in lower monthly payments.
If you’re looking to continue to grow your business, consolidating your business debt could help lower your monthly payments and free up the funds you need to do so. If you have strong finances, you may qualify for lower interest rates and/or longer repayment periods, and the money you save can be invested back into your business.
In this article, you will learn more about:
6 steps for consolidating business debt
Before you can determine the type of debt consolidation loan that fits your situation, there are a few steps to take to actually consolidate your business debt.
- Calculate your current debts. Knowing how much you owe on each current business loan, the lender, the interest rate, maturity date, and payment schedule is an important first step. Having this information handy will help ensure you find a consolidation loan that’s better than the loans you currently have.You should also calculate your average annual percentage rate (APR) of all of your existing loans, which can give you a general idea of the interest rate you currently have and what you should be looking for in a consolidation loan.
To help you decide if debt consolidation is right for you, try using a debt consolidation calculator.
- Check for penalties. Read the fine print of your current loan terms. Since you’ll be using a debt consolidation loan to pay off your other loans more quickly, most likely before their maturity date, you will find out if you will face prepayment penalties. If so, you’ll want to pay off your other loans first to avoid any fees./li>
- Know your credit score. For a consolidation loan with the lowest interest rate and best repayment options, you’ll likely need to have an exceptional credit score. Many lenders require your credit score to be 650 or higher. There are some lenders who may work with you if you have a score in the upper 500s; however, you’ll probably have a higher interest rate, and lower than that will likely be denied.
- Do research. There are several business loan consolidation options out there, with differing terms, interest rates, payment frequencies, maximums, requirements, and qualifications. Ideally, your new loan will have a lower interest rate than your old ones but keep an open mind depending on those that you’ll qualify for. You can use the information in this article as a starting point.
- Apply. Once you find the debt consolidation loan that’s right for you, it’s time to apply. Some loans you can apply for online, while others require you to visit a physical location or branch or call and speak to a representative over the phone. If you meet the qualifications and the loan option works for you, apply for the loan.When applying, you’ll likely need to submit financial documents such as:
- Future sales projections
- Personal and business tax returns
- Personal financial statements
- List of debts
- Profit and loss statements
- Balance sheets
If approved, you’ll receive information about the loan terms. Once background checks are passed, financial documents are reviewed, and your information is approved, you’ll receive a commitment letter. Once you complete all steps in the process, you’ll be sent final documents for your loan.
- Pay off your debt. The consolidation loan will likely have lower interest rates, but you should still work to pay off the debt as quickly as possible. Your new lender will divide up the money among your existing creditors, and all future payments will be made to the consolidated loan lender.
Overall, business debt consolidation works very similarly to personal loan consolidation. The goal is to find a consolidation loan that has a lower interest rate, and ideally better repayment options, to streamline your repayment and help save you money in the long-term. When you receive that new loan, your existing debt will be paid off with that money, and then make your monthly payment to the new loan.
Best business debt consolidation loan options
If you have multiple loans, debt consolidation may be the right option. Lower interest rates mean you’ll free up cash flow, and your payments will be simplified into one. When it comes to debt consolidation loan options for your business debt, there are a few options available to you.
1. Traditional bank loans
If you qualify, a bank loan may be your best option for consolidating business debt. You can get these loans from a bank or credit union. Typically, these loans have the lowest interest rates and longest terms.
The downside is it is difficult to qualify. In most cases, you will need to be highly qualified, in business for at least a few years years, have an outstanding credit score, and be able to prove significant revenue.
Bank loan term lengths are around 10 years with interest rates often below 10% and fixed monthly payments. Community and regional banks may help you consolidate your debt, but you can also apply with national banks, such as Chase and Bank of America.
2. SBA 7(a) loans
Your next best option if you don’t qualify for a bank loan is an SBA 7(a) loan. It can be used for a variety of purposes, including consolidating business debt. These loans are administered by the federal government and are specifically designed for small businesses. Additionally, these loans are made for businesses that are just starting out and may not be as financially stable.
However, there are some restrictions on this type of loan:
- The purpose of the original loans must be eligible for consolidation under the SBA 7(a) guidelines.
- The proposed loan needs to have a payment amount at least 10% less than existing loans.
- You must provide a written explanation for each loan about why the current lender’s terms are unreasonable.
SBA 7(a) loans have term lengths that range from 10-25 years, with interest rates ranging between 5.5% and 9.25% (in most cases.) These low interest rates and long terms make these loans more desirable, but the application process can be lengthy, and it can be difficult to meet qualifications.
3. Alternative lenders
Other lenders, such as Funding Circle, OnDeck, LendingClub, and other peer-to-peer lending companies can also be a debt consolidation loan option. These applications, usually completed online, are quicker and simpler to fill out and loans are easier to qualify for, though you may have to have a certain number of years in business or a minimum credit score.
The downside is that term lengths are shorter, ranging from less than a year to 10 years, and interest rates can be higher, even up to 20% or more. Payment frequencies may also vary, some even requiring daily or weekly repayments.
Best business debt consolidation loan companies
If you are not sure where to start, know that there are debt consolidation companies that focus specifically on business debt consolidation. There are other organizations that specialize in general debt consolidation, including business debts. Depending on the type of consolidation loan you are looking for, there are a variety of options to choose from.
Bank business loan companies
- Wells Fargo: Offers SBA 7(a) and SBA 504 loans. SBA 7(a) loans up to $5,000,000, with terms up to 25 years for commercial real estate or 10 years for all other purposes. Interest rates can be fixed or variable.
- Bank of America: Loans from $25,000 to $5,000,000 depending on your qualifications, with a 10% down payment, longer terms, and lower interest rates.
- Chase: An SBA preferred lender, Chase has loan funding up to $5,000,000 available, fixed, and variable interest rates, and flexible terms.
Alternative business loan companies
- Funding Circle: Working capital loans are available from $25,000 to $500,000 with terms up to 10 years and a flat 6% interest rate. Get funding in as little as 48 hours.
- OnDeck: With an OnDeck Term Loan, you can get amounts of $5,000 to $250,000 and repayment terms up to 24 months. Minimum requirements include 1 year in business, 600 credit score, and $100,000 in business annual gross revenue.
- LendingClub: Offer SBA loans from $400,000 to $5,000,000 with long-term, fixed interest rates, up to 10-year terms, and additional financing options depending on your business.
- Credibility Capital: These banks fund loans range from $50,000 to $500,000, with interest rates starting at 6.99% and terms ranging from 1-5 years.
- SmartBiz: Lines of credit range from $30,000 to $500,000 with repayment terms of 2-5 years. Interest rates start at 6.99%, and SmartBiz also offers access to lines of credit, invoice financing, and business credit cards.
Commonly asked questions
Is business debt consolidation the same as refinancing?
No, debt consolidation is different from refinancing. Refinancing is when you take out a lower-interest loan and use it to pay off the original loans. Consolidation loans pay off all of your other loans with the new loan, and you’ll make all of your payments to the new loan.
Will a business debt consolidation loan help my credit?
Debt consolidation loans shouldn’t hurt your credit. In fact, by paying off your debts, you may see an improvement in your credit score. However, failing to make payments on time, applying for additional loans, or increasing your credit utilization can all negatively impact your score, so make sure you make at least the minimum payment on time every month and avoid taking on additional business debt.
Can I get a debt consolidation loan with a 600 credit score?
The higher your credit score, the better you will be when it comes to being approved for lower interest rates. Many debt consolidation loans require an applicant to have a credit score of at least 600, though some prefer an even higher score. The lower your score, the higher the interest rate will be, and the more likely you will be denied.
Best business debt consolidation loan with bad credit
Credit unions and local banks may be willing to offer more leeway if you have poor credit, especially if you are already a customer. They may be able to consider your whole financial history, personal circumstances, and history with the bank in addition to your score. Some online lenders may also approve you for a bad-credit loan, though you will have higher interest rates. Check LendingClub, Upstart, or Avant.
Business debt consolidation loan for credit card debt
If you have multiple credit cards, each carrying debt, you may want to consider consolidating those debts to make repayment easier. The lenders listed above are a great place to start, because it does not necessarily matter what your debt is to be approved for the consolidation loan.
Related: How to Consolidate Credit Card Debt