A recent study issued by CreditSafe reported dismal news for businesses. Specifically, over half of companies surveyed (58 percent) said their long-term debt increased over the past 12 months. Operating expenses have also been growing since 2023.
As a business owner, you probably don’t need a study to tell you that expenses are increasing. If your debts (and their interest rates) are also rising, you could find relief with a business debt consolidation loan.
What is business debt consolidation?
Business debt consolidation isn’t much different from personal debt consolidation.
When successful, the process gets you a new loan to pay off multiple other loans and debt. You then focus on paying off a single loan at a monthly fixed rate. Business consolidation loans can offer a more extended repayment period, lower interest rates or both.
When to consider a business consolidation loan
A business consolidation loan could be worthwhile under certain circumstances.
You can get a lower interest rate
That consolidation loan should offer a lower interest rate than you currently pay.
“If you’re paying high interest rates on a business credit card and working capital loan, you might consider consolidating those debts into a business line of credit or loan with a lower interest rate,” says Ben Johnston, chief operating officer of business lender Kapitus.
You’re struggling to pay multiple debts
According to Joe Camberato, a business loan consolidation can provide a lifeline for businesses juggling multiple payments. Combining everything into a single loan can help simplify your financial life.
However, “if you’re handling current debts fine, consolidation might not be necessary, especially since it involves taking out a new loan with potentially different terms,” says Camberato, CEO and founder of National Business Capital, a fintech lending marketplace for business owners.
You want to simplify your budgeting
As a business owner, you have many demands on your time. Making multiple payments on various forms of debt shouldn’t take up more of your precious time.
“Your life as a business owner could be simplified by consolidating those into one financing option and debt payment,” Johnston explained.
Pros and cons of business loan consolidation
Before determining if a business consolidation loan is helpful for your purposes, here’s a look at the pros and cons.
Pros
- Faster debt repayment. You could have a lower monthly payment depending on the consolidation loan and its terms. This allows you to take the difference from what you were paying on multiple debt streams and direct it toward a single loan. The more money used to pay down the consolidation loan, the faster it’s paid off.
- Simplified budgeting. As mentioned above, consolidation means you have one monthly payment instead of many payments to various lenders. This cuts down on tracking multiple payment due dates. It can also boost your cash flow, which can help with payroll, equipment or other expenses.
- Potential credit score improvement. A single loan payment can help improve your payment history and, over time, your credit utilization score. Both of these aspects are invaluable for boosting your credit scores.
Cons
- You could pay more over time. While a business debt consolidation loan might lower your monthly payments, the terms could also mean it takes longer to pay off. As a result, you could pay more interest over the loan’s lifetime.
- You might still have cash-flow issues. A business debt consolidation loan helps—consolidate debt. Other issues, like too many expenses or too little revenue, require a different approach, such as working with a qualified accountant.
- Such loans require a high credit score. Obtaining the best interest rates and terms on a loan means you and/or your business need a good-to-great credit score. If your credit score is low to fair, you might want to consider another method of resolving business debt.
There are multiple business debt consolidation options available. Here are a few types of business loans to consider.
Traditional loans
Banks and credit unions are typically the first stop for businesses wishing to consolidate their debt. They can often offer favorable loan terms and interest rates.
However, “banks can be stricter and might only deal with bigger accounts,” says Camberato. Additionally, many banks might not consider you unless you’ve been in business for at least two years, have a positive cash flow and a good to excellent credit history.
Business lines of credit
A business line of credit is similar to a credit card in that you obtain funds in your account and withdraw them as needed. You pay interest on the amount you owe. A line of credit can be a flexible option, as it’s highly accessible. It can also help build your business credit score.
However, interest rates can be higher with this option. Then, there are the multiple fees attached to these lines of credit. These expenses could be higher than the interest you currently pay on loans.
SBA loans
The U.S. Small Business Administration (SBA) offers low-interest loans to small businesses. These loans are available through authorized lenders and are backed by the government.
Johnston explained that the SBA 7(a) loans can offer lower interest rates. However, he added that the loans “generally require excellent credit scores and considerable paperwork as part of the process.”
Private or alternative lenders
If you’re not eligible for a traditional or SBA loan, a private lender could be worth checking into. As long as lending to you makes good financial sense, “private lenders can be more flexible, offering terms that might suit smaller businesses or those with unique needs,” says Camberato.
Other alternative forms of business lending include online lenders, crowdfunding platforms and peer-to-peer lenders.
Other methods to manage business debt
If the disadvantages of a business debt consolidation loan outweigh the pros — or you can’t qualify for any business loan — these alternative debt relief strategies could help.
Look into business loan refinance or restructuring
Lenders don’t want you to default on your loan, and recouping their losses is costly. If you’re struggling and willing to meet creditors and lenders halfway, they might be able to help by refinancing or restructuring your loan.
- Refinancing: Refinancing involves taking out a new loan to pay off an old one. A refi could help lower your interest rates and monthly payments when done correctly. One caveat is that the process involves a fee, which may negate the good you’re trying to achieve.
- Restructuring: Through the restructuring process, you contact your lenders and ask them to modify the loan terms. This might involve payment deferral, a reduction or elimination of your interest rate or loan term extensions.
Consider a personal loan
A personal loan could be an option if you can’t qualify for a business debt consolidation loan. However, some personal lenders might restrict the use of their loans. Also, consider that you won’t be able to deduct interest rates on a personal loan as you can with a business loan.
Improve your financial position
If obtaining a debt consolidation loan isn’t in the cards, your best bet is to improve other financial issues.
“Maybe you can cut unnecessary expenses, find ways to increase revenue or negotiate better terms with your lenders,” says Camberato. “This might require some tough decisions, but it’s usually better than the alternative of defaulting on your debts.”
The bottom line
Taking out a business debt consolidation loan can be worth it if you want to improve cash flow, simplify budgeting or lower monthly payments. However, a longer repayment period might lead to paying more interest over the loan’s term.
There are times when consolidation isn’t a good plan. “Loan consolidation generally requires additional fees and longer terms,” says Johnston. “If you have the capacity to pay off your existing debt, you will likely pay it off faster while avoiding fees just by sticking to the agreed payment structure.”
FAQs
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Debt consolidation loans can be worth the time, paperwork and fees as long as that loan provides a better interest rate or longer repayment term. If you can’t get either one, the process and costs might not be worth it.
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Researching the lender you work with is as important as finding the right debt for consolidation.In addition to examining the loan amounts available, interest rates, repayment terms and other fees, you should also consider the lender’s reputation. Talk with business owners who have experience with the lender and research third-party review sites like Trustpilot.
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Debt consolidation means taking out a single loan to pay off multiple debts. Through debt refinancing, you’re replacing each loan with a new one. Both methods can reduce monthly payments, though consolidation can help simplify budgeting. Either option might be worthwhile if it offers lower interest rates, better repayment terms or both.
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