At a Glance

There are many reasons to take on debt when you’re running a business. For example, you may need excess funds to cover payroll, fund an emergency building repair, or launch a new product line. And if your small business has taken on a lot of debt, you may be struggling to manage multiple loan payments. That’s where it may be a smart financial move to consider business debt consolidation.

In this article, you’ll find:

What is Business Debt Consolidation

Much like personal debt consolidation, business debt consolidation involves taking out a new loan to pay off multiple existing debts, thereby streamlining debt repayment into a single monthly bill. Businesses will look for loans offering lower interest rates and repayment terms that align with a long-term financial plan.

Options to Consolidate Business Debt

There are two main ways businesses typically receive debt consolidation loans:

  1. Banks or Credit Unions: Banks or credit unions that offer personal debt consolidation loans likely offer business debt consolidation loans too. Bank business loans are generally easier to qualify for if you have a strong credit score and history. If you seek out a loan from a bank, be prepared to share specifics on the company’s income and business history.
  2. Small Business Administration (SBA): SBA loans are government loans specifically designed for small companies. SBA loans may have far fewer requirements for debt consolidation since they are designed for companies that are just starting out.
If your business is new, it may make sense to pursue federal loan options through the SBA.

How to Get a Business Debt Consolidation Loan

There are several steps to take to secure a business debt consolidation loan.

1. Get organized.

To apply for a debt consolidation loan, you’ll need to pull together documentation that may include:

  • Personal and business tax returns for the last several years
  • Financial statements
  • List of all existing business debt
  • Profit and loss statements for the last several years
  • Balance sheets for the last several years
  • Future business projections, including sales and revenue

2. Research lenders

Look for reputable lenders with great reviews, reasonable loan terms, and good interest rates for debt consolidation loans.

3. Apply and interview

Since small business debt consolidation loans are often for a lot of money, there will likely be an initial consultation and review process. That may include a sit-down with an underwriting team that decides whether or not you’re a good candidate for the loan.

4. Receive prequalification

If you pass the interview process and the lender reviews documentation without concern, you’ll receive a prequalification that outlines the loan terms.

5. Complete lender due diligence

Next, the lender will go through your financial history with a fine-toothed comb. In this process, they’ll look for previous lawsuits and tax issues. If everything checks out, you’ll get a commitment letter. Then, the lender can do a final review of existing loans and your payment history.

6. Finalize the deal and receive funds

Once the lender has reviewed all your information, they may issue final documents, which you’ll need to sign to receive the business debt consolidation loan. Then, you’re free to repay existing lenders and begin paying off your new loan.

There is a thorough process to obtain a business debt consolidation.

Pros of Business Debt Consolidation

There are several reasons why a business owner might benefit from debt consolidation.

  • Potential to improve credit score: If managing multiple payments was causing late or missed payments, your credit score may have suffered as a result. Streamlining debt to a single payment can often help increase your credit score due to better payment history.
  • Predictable monthly payments: By consolidating multiple debts to one payment, you’ll know exactly how much is due each month. Plus, you’ll benefit from knowing the date when your loan will be repaid in full.
  • Freed up cash flow: A lower interest rate means you’ll have more cash in your pocket each month. And that means more money is free for daily operating expenses and to keep the business running smoothly.

Cons of Business Debt Consolidation

There are also some risks borrowers should be aware of before pursuing debt consolidation.

  • Longer loan terms may mean paying more: Even though you may lock in a lower rate, extending the loan term could mean you’re still paying more in interest over time. That’s why it’s important to calculate savings with your existing repayment plan vs. the new loan terms.
  • It’s not a strategic solution to fix financial issues: While a business debt consolidation loan can help with effective debt management, it doesn’t change the behaviors that landed your company in debt. You may need to loop in financial professionals to help you develop a long-term vision for business success.
Consolidation can simplify managing your business debt, but it won’t solve all your problems.

Debt Consolidation vs. Refinancing

Some business owners can confuse debt consolidation with refinancing, but these are two separate ideas that can sometimes be used together.

  • Debt consolidation means using a new loan to pay off multiple existing loans. Then, you’ll continue to make a single monthly payment to the new loan until that debt is paid down.
  • Refinancing means substituting one loan for another, hopefully with more favorable loan terms and a better interest rate. The process of refinancing can happen when you trade one existing loan for a new one; it doesn’t deal with multiple debts.

It’s possible to refinance before or after debt consolidation. But keep in mind that neither of these options will automatically change what you owe. Instead, they’ll simply change the loan terms and amount due over the life of the loan.

If you have one or two loans, it may make sense to attempt refinancing for better loan terms before debt consolidation.

Debt Consolidation vs. Debt Relief and Debt Settlement

Debt settlement is a form of debt relief. Debt relief is the overarching term used to classify ways to release or reduce debt so it’s easier for the borrower to repay it. Debt settlement means negotiating with creditors to lower the amount due on a given debt, sometimes through drastic means such as ceasing payments altogether. This is very different from debt consolidation, which uses a new loan to pay off all existing debts in full in order to streamline payments. Then, the borrower works to pay off the debt consolidation loan