How to consolidate business debt

A young man in a white dress shirt looks over business finances and works on a laptop — fizkes/Getty Images.

If you have multiple business loans, you may be a good candidate for business debt consolidation. When you consolidate your business debt, you replace your existing loans with a single loan. A business debt consolidation loan can provide lower monthly payments, shorten your repayment term, or both.

Those with higher interest rates stand to save the most by consolidating business debt into one loan. But this may not be the best option for every small business owner. Not all consolidations will save on interest, offer better rates or resolve cash flow issues.

Plus, not all lenders will be a good fit. Newer businesses and those who don’t have a strong credit history may find an online lender offers better options. But established businesses with a strong history may get the best rates and longest repayment terms from traditional banks.

Here’s a closer look at how a small business loan can help you consolidate your business debt.

How business debt consolidation works

Business debt consolidation is when you take out a new business loan to pay off your existing business loans and debt. By taking out a small business debt consolidation loan, you’re moving many debts into one streamlined monthly payment.

Most often, business debt consolidation works like personal debt consolidation. It allows you to streamline your debt into one manageable payment. Debt consolidation loans can provide a longer repayment period, a lower interest rate, or both.

If you don’t see either benefit when searching for a business debt consolidation loan, it may not be in your best interest to consolidate.

How to consolidate business debt

While every lender will have different business loan requirements, most will look at factors such as your income, credit score and debt-to-income ratio. Below are several steps you can take to obtain a commercial debt consolidation loan:

Calculate how much debt you owe

The first step to consolidating your business debt is to calculate the total debt you owe. You can do this by adding up your payoff balances for all your loans to get a total amount.

Then use a business loan calculator to see how much of a business loan you can afford. This will show you the total loan amount you can afford, your monthly payments, and how much interest you’re likely to pay over the life of the loan.

Check your credit score

Lenders will look at your personal and business credit scores and credit reports to help determine your eligibility for a loan.

The higher your credit scores, the easier it will be to get an affordable business loan. For the best rates, you’ll want to have a personal credit score of 650 or higher, but there are bad credit business loans for business owners with poor credit.

Explore business debt consolidation options

There are multiple business debt consolidation options available. Here are a few types of business loans to consider:

Bank loans. Traditional banks and credit unions are the most well-known options to get a business debt consolidation loan. To be eligible, you usually need to be in business for two or more years and have a positive cash flow and a strong credit history.
SBA loans. The federal government offers loans for small businesses in financial need through the Small Business Administration (SBA). There are a number of SBA loans for businesses, including SBA 7(a) loans and microloans.
Alternative loans. For those who can’t get a traditional loan and don’t qualify for an SBA loan, alternative lenders are known for relaxed eligibility requirements and fast funding. Types of alternative lenders include online lenders, crowdfunding platforms, direct private lenders and peer-to-peer lenders.
Business line of credit. With a business line of credit, you get access to funds quickly and only pay interest on the amount you use. As you pay down the balance, you gain more available credit to use.
Business credit card balance transfer. If you have a business credit card and qualify for a 0{d0229a57248bc83f80dcf53d285ae037b39e8d57980e4e23347103bb2289e3f9} introductory balance transfer APR, this option may be a way to reduce business debts. Rather than consolidate through a loan, you’d transfer the loan balances to the credit card. This option should only be used if you can repay the entire balance before the introductory period is over. If not, interest charges kick in and could put you right back into debt.

Compare business debt lenders

Not all lenders are equal, and comparing them can help you identify which lender will offer the best business debt consolidation loan. When it’s time to get a business loan, compare lenders to see which one has the best options.

You’ll want to look at more than the loan amount and interest rates. Compare additional fees, repayment terms and any other additional costs.

If you prefer to make payments online, you may want a tech-savvy bank or online lender. But if you’d rather make payments in person or through the mail, a credit union or traditional bank may be a better choice.

Gather documentation and other information

Once you’ve selected a lender, it’s time to gather your documentation and other information to prepare for the next step. The types of documents you need can vary by lender, but expect to provide:

Personal documentation about other income sources, background and finances.
A business plan, including how you plan to repay the loan and allocate funds to boost revenue.
Proof of business ownership and status, insurance, licensing, legal documentation
Two years of tax returns, profit and loss statements, bank statements and cash flow projections.
Payroll records.

Apply for the loan

Now you’re ready to apply for the loan. Being prepared from the previous steps will make this step easier. Most lenders offer an online application, which may only require minimal paperwork in the beginning.

Once you submit the application, the lender will review it and contact you to discuss eligibility and further paperwork requirements. Depending on the lender you choose, it can take minutes or days to get a decision. Following up, especially with an SBA loan application, may be necessary to ensure the lender has what it needs to make a decision.

Close the deal

After the lender has approved your application, it’s time to close the deal. Make sure the interest rate and repayment terms are more favorable than what your current loans offer.

You’ll either meet with the lender in person or sign the loan documents online. Before signing, make sure you read the documents carefully and thoroughly so you understand the lender’s expectations, any charges or penalties you could be assessed, and the process of paying off our outstanding loans with the business debt consolidation loan.

Once you’ve received funds, you’ll pay off your existing debts or your lender may do this for you. You’ll then begin making payments on your new loan.

Pros and cons of consolidating business debt

So is a business debt consolidation loan worth it? This method may be a good option if you want to streamline your payments, but you should be aware of the advantages and disadvantages before applying.

Pros

Faster debt repayment. Depending on your repayment terms, you could end up with a lower monthly payment. You can take the difference from what you were paying on multiple loans and apply to the single consolidation loan to repay it faster. The sooner you pay it off, the more interest you’ll save.
More manageable payments. When you consolidate all your business debt into one loan, it provides a lower monthly payment and makes the debt more manageable since you no longer have to keep track of multiple payments and due dates.
Improved cash flow. If you score a lower interest rate, this can help you save money that can go toward important purchases, payroll or other business needs.
Possible credit score boost. If you can manage payments better with one loan payment, you’ll have a better payment history. This can boost your business credit score as long as your lender reports your on-time payments to one or more credit bureaus.

Cons

Lower interest rate isn’t guaranteed. If you get a loan that doesn’t have a lower interest rate than what you’re paying now, you could end up paying more than what you currently owe. If you can’t secure a lower interest rate, business debt consolidation might not be worth it.
Paying more interest over time. Your repayment terms might mean a lower monthly payment, but it could create a longer repayment schedule, which might lead to paying more interest over the life of the loan.
Your cash flow issues might not get resolved. If you already have cash flow issues, consolidating your business debt probably won’t resolve them. Addressing your business expenses and revenue, creating ways to improve sales or working with a financial advisor may be better solutions to improving your cash flow problems.

The bottom line

Business debt consolidation may improve your cash flow, provide more manageable payments, boost your credit or help you repay your debt faster. But it’s not a cure-all for existing financial problems, might not land you a better interest rate and could increase the amount of interest you pay.

If the pros outweigh the cons, it may be worth taking the steps to get a business consolidation loan. Depending on your business’s financial and credit history, plus the amount you owe, you have multiple options. There are traditional lenders, online solutions, SBA loans and even credit card balance transfers to consider.

Frequently asked questions

Debt consolidation loans can be worth it if you can get a better interest rate or longer repayment term. But if you can’t get either, it may not be worth it. Keep in mind, a longer repayment period could mean you end up paying more interest over the life of the loan. And if you’re experiencing cash flow issues, it might not provide the money you expect.
Yes, you can use a business loan to consolidate debt, as long as it’s business debt. You can secure a business loan through an online lender, a traditional banking institution or through the Small Business Administration (SBA). Once you get the funding, use it to pay off your existing business debt.
If you’re looking to get out of business debt fast, there are a few things you can do. Take inventory of your debts to see which ones make the most sense to tackle first — usually the debts with the highest interest rates. Another option is to refinance or consolidate high-cost debts, like ones with variable or high interest rates. You can also look for ways to boost sales, like implementing loyalty rewards, engaging on social media or raising prices. Cutting costs by selling off equipment you no longer use, downsizing or splitting costs by sharing resources with other companies can also help you get out of business debt faster.
Business debt can be written off if the debt is considered worthless after incurring a business-related debt and previously included as income. Business bad debts include business loan guarantees, customer credit sales and client, supplier, distributor or employee loans.
The difference between debt consolidation and debt refinancing is the number of loans you’re replacing. With debt consolidations, you’re taking multiple loans and consolidating them into one loan. But with debt refinancing, you’re taking out one loan to replace it with another. Either option may be beneficial if it offers better repayment terms, a lower interest rate or both.

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How to consolidate business debt

How business debt consolidation works