Almost every business will seek out financing at one point or another. After all, financing allows you to purchase supplies, mitigate cash flow disruptions – even initiative growth ventures.
If you’ve taken out a number of business loans, you may find yourself struggling to keep track of multiple payments.
It’s much easier to manage a single loan with a set interest rate and repayment schedule – which is why many businesses turn to debt consolidation. But how does debt consolidation work? And is consolidating debt the right move for your business? Here’s what you need to know.
What does it mean to consolidate business debt?
Debt consolidation entails combining multiple outstanding loans into a single, new loan. You would start by reviewing which business loans you’d want to consolidate and then apply for a funding amount that covers your total outstanding balance.
Once you’re approved, use the proceeds from the new loan to pay off the other loans. From there, you’ll make payments on your new loan – which hopefully would feature a lower interest rate.
Although there’s no guarantee, debt consolidation has been known to help businesses manage payments better and can even result in reduced interest rates, extended loan terms, or even higher funding amounts.
Business debt consolidation vs. refinancing
Consolidating business debt automatically implies getting a new loan to pay off two or more existing loans. Refinancing also entails taking out a new loan – but doesn’t necessarily involve paying off multiple loans.
Plus, the main goal of refinancing is to secure a lower interest rate, better terms, or lower monthly payments.
With business debt consolidation, the intention is to combine multiple loan payments into one single payment – in order to make them more manageable. Receiving a lower interest rate is just an added bonus.
Debt consolidation options
There are many different ways to obtain a debt consolidation business loan. The most common include:
Bank loans: Banks and credit unions are known for offering low rates on loans. However, these lenders have strict borrower requirements and long application processes – which may not make them feasible for every business.
SBA loans: The Small Business Administration (SBA) offers a multitude of lending programs through various participating lenders. SBA loans are some of the most sought-after forms of business financing and debt consolidation, due to low-interest rates and favorable repayment terms. However, these loans can also be difficult to qualify for.
Online lenders: Fintechs and online lenders can be especially popular choices for financing and debt consolidation. They are known to be fast, flexible, and feature looser qualification requirements.
6 steps to consolidating business debt
These are the most important steps to help you get started on consolidating your business debt.
- Take stock of your outstanding loans
Start by reviewing the number of outstanding loans you have as well as the interest rates and terms on each. Add up the total amount of debt you owe to understand how much financing you’ll need.
- Check for prepayment penalties
Make sure to read the fine print on each of your outstanding loans. Look out for prepayment penalties or a fee that some lenders charge if you pay off your loan early. If your lender charges a prepayment penalty, you may need to adjust the borrowing amount or your target interest rate on your new loan to account for these costs.
- Look for lenders to consolidate business debt
Shift through different lenders to get a feel for how likely you are to qualify at each. For example, if you have strong credit, sound financials, and aren’t in a rush to secure financing – a bank may be a great option. However, if you’re looking for fast funding and more flexible requirements, you may be better off with an online lender.
- Compare different financing solutions
As you review different lenders, make sure to compare different loan terms and interest rates. This will help you find the best deal for your qualifications. At National, we make it easy to compare numerous financing solutions and business debt consolidation offers.
- Prepare for the application process
At the very least, lenders will want to review copies of your tax returns, bank statements, credit reports, and other key financial statements. Make sure to double-check with your lender about the exact documents you’ll need to provide. Keep in mind that any mistakes or incorrect information can delay the application process.
- Pay off your old loans with your new one
Once your business debt consolidation loan is granted, you’ll be able to use the funds to pay off your other debts. Just make sure to get confirmation from your lenders that the old loans have been paid off in full.
Business debt consolidation requirements
If you’re going to get approved for a business debt consolidation loan, you’re going to have to provide multiple documents. Exact requirements will vary by lenders, however, in most cases, you’ll need:
- Business credit score (at least 680)
- Personal credit score (at least 680)
- Tax returns for the last two years
- Business balance sheets
- Profit and loss statements
- Information on each debt being consolidated – including lender name, outstanding balance, terms, interest rate, and payment schedule
Keep in mind that banks tend to pose the most rigid requirements – especially when it comes to emphasizing your credit score. On the other hand, online lenders tend to be the most flexible.
Pros and cons of consolidating business debt
Debt consolidation can offer many benefits. However, it’s not always the right solution for every business. In order to determine whether or not you should take out a business debt consolidation loan – it helps to review the pros and cons.
Pros of business debt consolidation
- More manageable monthly payments
- Simplified repayment terms
- Possible lower interest rate
- Possibility to secure better terms or a higher funding amount
Cons of business debt consolidation
- Lower interest rates aren’t guaranteed
- It can be difficult to get approved for a business debt consolidation loan
- Some lenders may require a down payment or collateral
- Your interest rates may actually go up
Compare different business debt consolidation loans
National is a leading business financing marketplace that makes it easy to find the best business debt consolidation loans. Our system automatically takes into account your credentials and connects you with over 75 different lenders. With a simple, 60-second application process, you’ll be able to review a multitude of financing solutions.
Learn more about debt consolidation for your business and the new rates and terms you could qualify for here.