Juggling multiple high-interest loans or credit lines can compromise your company’s cash flow. Business debt consolidation offers a way to reorganize your obligations by rolling them into a single monthly payment with potentially better terms.
This guide explores how the process works, the various lending options available, and what you should consider before signing a new loan agreement.
How Does Business Debt Consolidation Work?
Consolidating business debt is a lot like consolidating personal debt. If your company has multiple loans, business credit cards, or other lines of credit, you can use a business consolidation loan to replace them with a single account.
In addition to replacing multiple monthly payments with one, you may be able to secure a lower interest rate or otherwise more favorable loan terms. However, there are often origination fees, so it’s not something you should do recklessly.
Debt Consolidation for Businesses: Exploring Your Options
Loans for business debt consolidation aren’t as common as those for consolidating personal debt. However, that doesn’t mean that business owners don’t have options. If you want to consolidate your company’s debt, consider the following solutions.
Traditional Bank Financing
Traditional banks and credit unions typically offer the most favorable interest rates and longest repayment terms. However, they have the strictest eligibility requirements. For example, lenders may expect to see a high credit score, several years of profitable operation, and a strong debt-to-income ratio.
Small Business Administration (SBA)
The SBA offers several programs you can use to refinance existing business debt, including the 7(a) loan. Because they’re partially backed by the federal government, they may offer lower rates and longer terms to small businesses that might not qualify for traditional bank financing. The trade-off is a lengthy application process with significant paperwork.
Online or Alternative Lenders
If your business can’t get approved through a traditional financial institution or the SBA, consider business debt consolidation companies. Online lenders and peer-to-peer lending platforms may have less stringent requirements and more flexible loan terms.
However, these options typically carry higher interest rates and fees that can make them less favorable from a financial perspective.
What Do Lenders Look For?
Every lender has different criteria for business loans and lines of credit. However, you can generally expect them to consider factors like the following:
- Total years in business
- Annual and monthly revenue
- Debt-to-income ratio
- Business credit score
- Your personal credit score
If you’re lacking in some of these areas, you may not be able to qualify for business debt consolidation. Even if you do, you may receive terms that make the transaction unfavorable.
Is There a Downside to Debt Consolidation?
Debt consolidation can help you restructure your finances, but there are potential drawbacks. Most notably, you could end up paying more in interest over time, even if the new loan’s rate is lower than you were paying before.
This typically occurs when you lower your monthly payment or extend the repayment term, giving interest more time to accrue. In addition, some loans carry high origination fees that can eat into your savings.
Weigh Your Options Carefully When Considering Debt Consolidation for Business Owners
Business debt consolidation can be a valuable tool, but it can also backfire. Before committing, evaluate how a new loan impacts your total interest and repayment timeline. Analyze key metrics like the weighted average interest rate and total debt duration.
While lower monthly payments provide immediate relief, extending the term could increase overall costs. Always run the numbers to confirm that consolidation will genuinely improve your company’s long-term financial health.
