Business consolidation loans help people manage business debt by lengthening borrowing terms and reducing monthly payments. Debt typically is unavoidable in the business world. Borrowing money allows you to hit key objectives like running an ad campaign, hiring more people or opening a new storefront. However, these debts can quickly become a mounting problem if you can’t keep up with payments.
Business debt consolidation allows you to combine multiple loans into one. This gives you one monthly payment and often a lower interest rate. If your small business is looking into consolidation loans, learn more about how this practice can help improve cash flow and lead to long-term growth.
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What Are Business Consolidation Loans?
Business consolidation loans and small business consolidation loans combine multiple debts into one loan with a simplified repayment plan.
For example, if your small business has a Small Business Association (SBA) loan, an equipment loan and a term loan, you would have three separate monthly payment sums and likely three separate interest rates. It might look something like this:
- SBA loan for $50,000
- 12% interest rate
- 5-year repayment term
- About $1,100 monthly payment
- Equipment loan for $20,000
- 8% interest rate
- 3-year repayment term
- About $630 monthly payment
- Short-term loan for $30,000
- 10% interest rate
- 18-month repayment term
- About $1,800 monthly repayment
In total, your business owes $3,530 per month.
With small business consolidation loans, you can renegotiate the terms and interest rates of these debts. Then you clump them into one loan with one term and one interest rate. Let’s say you owe $86,000 total on your three existing loans after making several payments, but you’re starting to fall behind. A business debt consolidation lender may offer to pay off all three of these debts and present you with a new $86,000 loan. For example:
- “Lender Bank,” a business debt consolidation lender, offers to buy your loans for $86,000 at a 10% interest rate, to be paid off over a five-year term.
- Now, instead of paying three separate lenders each month a total of $3,530, you would owe “Lender Bank” just $1,800 per month for all of your debts combined. That’s $1,700 less each month, just from business debt consolidation.
Plus, you now have more time to pay off your equipment loan and short-term loan.
Note that the interest rate decreased for the SBA loan, but stayed the same for the short-term loan and actually increased for the equipment loan. This is a possibility with business loan consolidation. However, it can still be worthwhile if you’re looking to pay less each month overall.
Of course, these numbers are only used to illustrate an example, and business loans are often much more complex and expensive.
Business Debt Consolidation vs. Refinancing
Business loan refinancing involves paying a fee to renegotiate the terms and interest rates of a single loan, while business debt consolidation refers to the bundling and renegotiating of two or more loans.
Benefits of Consolidating Business Debt
Business debt consolidation can be a boon to your small business if you’re struggling with multiple payments. This process simplifies your repayment schedule, provides the opportunity for lower interest rates, improves cash flow and takes stress off your shoulders as a small business owner.
- Simplified Repayment Schedules
When you have several business loans, all with different terms, managing repayment can get complicated. Small business consolidation loans allow you to simplify all of your loans into one term length, allowing you to get back on track. Often, business consolidation firms offer longer terms — some up to 25 years — in order to help get monthly payment amounts down.
- Potential Interest Savings
Just like personal debt consolidation, business debt consolidation usually offers lower interest rates. If you qualify, you could end up with a business loan interest rate as low as 5%.
You’re swapping expensive debt for more affordable debt. Because you’re paying less each month, you have more money to go around for operations, marketing and other office expenses.
- Reduced Financial Stress
Business debt consolidation can be a safety net, especially if your business is drowning in operating costs or facing insolvency. With one consolidated lower monthly payment, you can worry less about dishing out your hard-earned money to several different lenders. One simple payment each month can free up a lot of real estate in the mind of a business owner.
Depending on your circumstances, there are also some potential cons to business debt consolidation. You might not save very much money month-to-month, so the main benefit would be the single payment. You also could end up stuck with a long-term loan that will cost you much more than you anticipated. We’ll cover more business debt consolidation mistakes to avoid a bit later.
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How Business Consolidation Loans Work
If you’re ready to apply for a business consolidation loan, there are a few things you can do to get started.
First and foremost, you’ll need a lender. For small business consolidation loans, you have several options including banks, the SBA and online lenders. Gather all the information you can about interest rates, APRs, term lengths and the various fees attached to your loan of choice.
- Apply with Pertinent Information
Provide information about your small business including your personal and business credit scores, the amount of money you owe to all lenders, interest rates and tax returns. It’s also a good idea to include a letter of explanation, detailing why you’re applying for business debt consolidation in the first place. If you can show that you have a plan for your business, you may be more likely to get approved.
- Pay Off Your Existing Loans
Once you’ve been approved for a business consolidation loan, the lender will either pay off your existing loans or deposit the money into your account for you to do this step. When your existing loans have been satisfied, your new lender will fully take over ownership of your debt.
- Start Making a New Monthly Payment
When your new lender verifies your other loans have been repaid, you can start making a new monthly payment. Ideally, it will be significantly lower than what you used to owe.
How to Qualify for a Business Consolidation Loan
You need to meet several requirements to secure a business consolidation loan. Each lender has different qualifications, but there are a few things you’ll need regardless of who you work with:
Have a Good, Very Good or Exceptional Credit Score
Most debt consolidation lenders won’t approve businesses for a loan without a good, very good or excellent credit score. If you have a fair or poor credit score, this may not be a good time to apply for consolidation.
Provide Financial Statements
You will need to hand over important financial statements including tax information, proof of business revenue and your borrowing history.
Consider Collateral Options
Many business debt consolidation lenders require you to put up collateral in order to secure your new loan. This might include things like vehicles, equipment, real estate and inventory.
Best Lenders for Business Consolidation Loans in 2024
Sifting through business loan consolidation options can be overwhelming. There are countless lenders, but some are more reputable than others. Here are a few that stand out in 2024.
One of the best business loan consolidation options is the SBA 7(a). Small business owners can qualify for consolidation up to $5 million, with repayment terms up to 25 years. Interest rates are also low and max out at your base rate + 6.5%.
If your business is in a lower revenue category, Funding Circle is a great option. It offers consolidation loans up to $500,000 for up to seven years for repayment. Interest rates start around 15%.
If the SBA 7(a) isn’t right for you but you’re still looking for long-term debt consolidation loans, BHG Financial offers repayment plans up to 12 years. It also has competitive interest rates, starting around 8%. Loan amounts must total at least $20,000 to apply.
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Common Mistakes to Avoid When Consolidating Business Debt
Business debt consolidation is tempting, but it’s not always as simple as it seems. Avoid these common mistakes:
Not Shopping Around
One of the worst mistakes you can make is acting impulsively and choosing a business debt consolidation lender without weighing all of your options. Look for the best interest rates and ideal terms for your situation, and pay attention to fees.
Consolidating Without Improving Cash Flow
Sometimes the promise of a lower monthly payment is so alluring that you enter into a new loan contract without actually saving yourself very much money. Business debt consolidation can turn into a lengthy obligation that you’re itching to get out of if the math doesn’t add up.
Using Consolidation as a Short-Term Fix
Business consolidation loans are not a bandage for bad financial decisions. They are serious, long-term commitments. If you’re not careful, you could end up in exactly the same spot — unable to make your monthly payments. If you don’t have a good plan in place or a solid reason for consolidation, it’s probably time to explore other options, including the possibility of bankruptcy.
Remember, consolidating your business debt can be a great opportunity for growth, but it may not be the right fit for your small business. Always weigh the pros and cons, and consider all of your options before jumping into a new loan agreement.