If your business has taken out multiple loans, you could find yourself struggling to stay on top of different due dates, interest rates, balances, and more. Keeping track of various credit accounts at once can be a hassle. One solution involves streamlining your finances through business debt consolidation.
Business debt consolidation involves taking out a new loan to pay off your existing balances and combining different debts into a single payment. You’ll simplify the repayment process, and in some cases, you may even be able to secure a lower interest rate.
Read on to learn how business debt consolidation works and whether it’s the right strategy for your business.
What Is a Business Debt Consolidation Loan?
A business debt consolidation loan is used for the purpose of paying off existing balances and combining multiple forms of debt into a single payment.
While tracking multiple payments can quickly become overwhelming, business debt consolidation loans allow for greater convenience – making it easier to pay back what you owe.
Ideally, your business debt consolidation loan should cover all of your existing balances. This means that if the total value of all your debt adds up to $100,000, you should take out a debt consolidation loan valued at $100,000 or higher.
In some cases, it’s possible to secure your new business debt consolidation loan at a lower interest rate compared to what you’ve been paying. When this happens, you may be able to save or even lower your monthly payments.
Types of Business Debt Consolidation Loans
Business debt consolidation loans can take on different forms, but generally, there are two main types.
Term loans
Term loans can be offered by banks or alternative lenders, such as online lenders. Term loans are ideal for business debt consolidation because they deposit as a lump sum, allowing you to pay off your existing debts right away.
Term loans feature fixed interest rates and repayment terms, which means that your new payment will stay consistent for the duration of the loan.
SBA loans
SBA loans are funded by the Small Business Administration and are available through participating banks and some online lenders. SBA loans are another solid option for business debt consolidation since these loans offer some of the lowest rates available on the market.
What’s the Difference Between Business Debt Consolidation vs. Refinancing?
At first glance, business debt consolidation and refinancing may seem similar, since they both involve taking out a new loan to pay off existing debt. However, each strategy serves a fundamentally different purpose.
The main goal of refinancing is to obtain a lower interest rate and better repayment terms. Refinancing also doesn’t have to involve multiple different types of debt. Often, businesses will refinance one loan with another to secure savings.
Business debt consolidation is meant to replace multiple different types of debt with a single new loan. If possible, simultaneously securing a lower interest is an additional advantage, but saving is not the primary goal of debt consolidation. Instead, the focus is on cutting down multiple balances in favor of more simplified repayments.
Deciding Whether You Should Consolidate Business Debt
As you decide whether to take out a business debt consolidation loan, it’s important to weigh the different pros and cons. Consider the following in order to determine the right move for your business.
Benefits of Business Debt Consolidation
Business debt consolidation loans can offer a number of advantages. Take a look at the most common.
Manageable payments
By far, the number one reason businesses seek out debt consolidation is for simplified payments. It can be difficult to keep track of multiple due dates and balances. Instead, combining everything into a single new loan allows for greater convenience and makes it easier to stay on top of debt.
Improved cash flow
Replacing multiple balances with a single debt consolidation loan enables you to track your payment schedule more effectively. You’ll be better able to plan ahead and keep your cash flow in check.
Potential savings
If your business’s credit score or other qualifications improved significantly since you last received financing, you may be able to qualify for a lower interest rate on your new debt consolidation loan. Although not the main goal of business loan debt consolidation, it can be an advantageous side effect.
Potential credit score boost
When you merge your debts into a single payment, you’ll be better able to keep track of due dates and ensure you repay on time. This can boost your business credit score, which can help you secure more favorable lending solutions down the line.
Potential earlier payoff date
If you’re able to obtain a lower interest rate on a debt consolidation loan, you may be able to use the funds to make extra payments and pay down your debt faster.
Drawbacks of Business Debt Consolidation
Business debt consolidation loans feature additional costs which, if you don’t weigh them correctly, can eat into the potential benefits.
Potential fees
Debt consolidation can be costly. There are a number of fees you will need to cover associated with processing, underwriting, and closing on your new loan. These costs can quickly add up, so it’s important to weigh them thoroughly against the benefits.
Potentially higher interest rates
There’s no guarantee that the interest rates you’ll receive on your debt consolidation loan will be lower than those on your current loans. In fact, depending on market influences and your own qualifications, it’s possible that the interest rates you receive could be higher than the loans you’re trying to consolidate.
You’ll want to compare different debt consolidation loan offers alongside one another in order to understand the best rates you can qualify for. Using a B2B business financing platform like National Business Capital is a great way to get an overview of all your opportunities. Rather than apply to lenders one by one, you can receive multiple competitive offers with one digital application.
Won’t solve underlying financial issues
If your business’s debt-to-income ratio is high and you’re struggling financially to pay back your debts, consolidating your loans won’t offer much relief. In these cases, you’ll need to focus on addressing the underlying issues in your business instead of consolidating your debt.
Understanding if a Business Debt Consolidation Loan Is the Right Move
It’s helpful to weigh the different pros and cons associated with business debt consolidation, but you’ll also want to consider additional factors. Take a look at some of the scenarios where business debt consolidation may prove to be an effective solution.
Large amounts of different types of debt
Each loan you’ve taken out comes with a repayment schedule, and they don’t always line up with one another. If you have a significant outstanding balance with multiple lenders, consolidating your debt can make it much easier to track and manage your debt repayment.
Rather than juggle multiple accounts, you can simplify your finances and reduce the number of bills you have to handle by consolidating.
High credit score
If your business has strong credit or if you’ve significantly improved your credit score since initially taking out financing, you’ll likely be able to qualify for better terms on your new debt consolidation loan. This will help you save and may even result in lower costs over the life of your new loan.
Viable cash flow
Taking out a debt consolidation loan may or may not lower your monthly payments. A lot will depend on market interest rates, your credit score, and other qualifications. Either way, you’ll want to go over your various debt consolidation loan offers to ensure you have enough cash flow to cover your new payment.
How to Get a Business Debt Consolidation Loan
The specific steps you’ll take to begin your business debt consolidation can vary from lender to lender. However, in most cases, you can expect the process to involve the following steps.
1. Assess your business debt
Go through all of your balances to understand exactly how much you’ll need to borrow for a debt consolidation loan. This is also a good time to research the various policies associated with each of your credit accounts. For example, you may want to verify if any of your balances come with prepayment penalties, which may prevent you from taking out a debt consolidation loan.
2. Check your credit score
You’ll receive better approval odds and qualify for better terms if your credit score is in good shape. This means having a score of at least 650 or higher. However, you can still qualify for a debt consolidation loan with a lower credit score, depending on the lender you work with.
3. Explore different lenders
It’s a good idea to consult with more than one lender before committing to a debt consolidation loan offer. Instead of filling out numerous different applications, working with a B2B business financing company like National Business Capital is a seamless way to generate multiple offers instantly. From there, you can compare details and select the loan offering the best fit.
4. Submit your documents
You’ll typically need to provide a number of your business’s financial documents when you apply for a loan, although the exact requirements will vary by lender. Generally, you should prepare your tax returns, financial statements, cash flow statements, and more.
5. Accept your business debt consolidation loan
After committing to a loan offer that works, you’ll be able to move along toward closing. It may take some time for your funds to deposit, but once they do, make sure to pay off all of your existing debts and balances. From there, you can focus solely on your new streamlined payments for your debt consolidation loan.
Apply for a Business Debt Consolidation Loan With National
Explore your options for a business debt consolidation loan through National Business Capital. Our online application process only takes a minute and can connect you with over 75 different lenders. It’s never been easier to browse and select the best loan offers. Get started!