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Understanding Business Debt Consolidation Loan Options

Understanding Business Debt Consolidation Loan Options
Susan Guillory

Susan Guillory

Updated August 24, 2021
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As a business owner, you may have taken out a loan or line of credit or two. And you may also have charged expenses on business credit cards. Having multiple payments to make on all these debts, all at different rates and terms, can complicate your financing unnecessarily and cost you more in the long run.Small business debt consolidation can let you essentially combine all your debts into one loan that you pay off at one fixed rate in one payment per month. As a result, you may end up paying less in interest and fees than you would have if you were still dealing with multiple debts.

What Is Business Debt Consolidation?

Business debt consolidation, also called commercial debt consolidation, refers to a loan that you can use to pay off other loans, lines of credit, and/or credit cards. Once you receive the business debt consolidation loan funds, you pay the balances you owe on your other business debts.A business consolidation loan, just like any other financing vehicle, charges interest. It may also require you to pay an origination fee. Even considering these costs, though, it may end up totaling less overall than you’re paying across the board for your multiple debts. And ideally it will also simplify your payments. You pay back the loan, including interest and any fees, in set monthly payments for an agreed-upon period of time.

Pros and Cons of Debt Consolidation Loans

There are a variety of factors to keep in mind when you’re considering taking out a debt consolidation loan. Pros of Debt Consolidation Loans:
  • A debt consolidation loan can make your loan payments simpler to manage
  • Ideally, a debt consolidation loan will allow you to lower the amount of interest you’re paying on your business debts
  • Paying back your consolidation loan promptly each month may improve your (or your business’s) credit rating over time
Cons of Debt Consolidation Loans’
  • When you take out a loan, it can impact your debt-to-income ratio and potentially your credit score. 
  • Before taking out a loan for consolidation, you need to make sure the lender allows the funds to be used for that purpose.
  • Some of the loans you’re trying to pay off may have prepayment penalties.
  • There may be an origination fee attached to your consolidation loan. 

Is Business Debt Consolidation the Same as Refinancing?

If you’ve been researching how to refinance a business loan, you might wonder if debt consolidation is the same thing. It’s not. Refinancing a business loan is typically done to pay off one single debt and secure a lower interest rate. Debt consolidation, however, is designed to help you roll all your debts into one monthly payment, ideally at a lower rate. And some may consider it primarily as a tool to streamline their business finances.

Will a Business Debt Consolidation Loan Help My Credit?

If you opt for debt consolidation, it’s possible that there might be an initial negative impact on your credit. But over time you may see an improvement in your (or your business’s)  credit score, The credit report will reflect you paying off your outstanding debts, as well as your on-time monthly debt consolidation loan payments.And as you pay down your consolidation loan, you’ll improve your credit utilization ratio (how much credit you have available vs. how much of it you’ve used). This ratio contributes significantly to your credit score, so as you free up more credit, your score may improve.

When to Consider Consolidating Debt

Taking on another loan is not something to do lightly. If you’re struggling to pay many debt payments each month as well as stay on top of your normal business expenses, you might be tempted to look to emergency business loans as a quick fix. But creating a deliberate strategy to consolidate your business debt instead may leave you  better off in the long run.You can judge for yourself whether a debt consolidation loan would be useful in simplifying your monthly payments. Assessing whether a consolidation loan can save you money requires slightly more work. Take a moment to add up all your outstanding debt (the total balance you owe) and then add up the interest you pay each year on the loans. Divide  the first number by the second and multiply the result by 100  to get a sense of the overall interest rate you’re paying on these loans. Now add up your monthly payments for all of these different debts. If you're looking for  a debt consolidation loan, you probably want to find a rate that’s lower than the average of those different interest rates and with a monthly payment that is less than the total you’ve been paying each month.For example, let’s say you have one debt on which you still owe $20,000 and another on which you owe $30,000. If you’re paying $3,000 in interest per year on the first and $4,500 on the second, when you divide $7,500 by 50,000, you get 0.15, which translates to an interest rate of 15.00%. In this situation, it would make sense to look for a loan with an interest rate lower than 15.00%.

Lenders Offering Business Debt Consolidation Loans

There are business debt consolidation companies that focus specifically on debt consolidation. But you may be able to use a loan for consolidating debt even if it isn’t designated solely for that purpose. If you qualify for a more traditional type of financing, such as a bank loan, you may get the best possible rates there. Just be sure to read the loan’s fine print to ensure that consolidating debt isn’t prohibited.Here are some financing options to consolidate your debt.

Bank Business Loan

The bank you already have a relationship with may be a good place to start your research. Note, however, that if you have a high debt-to-income ratio, some banks may not want to approve you for additional financing.Just about every bank offers business loans, including:
  • Wells Fargo
  • Bank of America
  • Chase

Alternative Business Loan

If you don’t qualify for financing your debt consolidation with a bank, consider alternative lenders, as they tend to be less stringent about what qualifications they require. Credibility Capital, for example, requires that you’ve been in business 24 months or more, you’re currently generating revenue, and you’ve had no bankruptcies within the past five years. This is in contrast to a bank like Bank of America, which requires you to have two years in business and $250,000 or more in revenues.Funding Circle is another alternative lender that offers working capital loans, business term loans, and lines of credit that may be used to consolidate your debt. Working capital loans are available from $25,100 to $400,000 with terms of 6-18 months. Factor rates (which are similar to  interest rates but also indicate how much you’ll be paying back on your loan) are as low as 1.15. You can see funds deposited into your account quickly--as soon as the next day.SmartBiz, in addition to connecting applicants with lenders offering SBA loans, also provides access to business lines of credit, invoice financing, and business credit cards. The lines of credit and loans range from $30,000 to $500,000, with repayment terms of 24-60 months. Interest rates start at 6.99%.

Personal Loan

In the event that your business doesn't qualify for financing or your business debt is on personal credit cards, you might want to consider taking out a personal loan to consolidate your business debt.One personal debt consolidation lender is Upgrade. Its loans can be used to roll up various debts or for other purposes, like home improvement or major purchases. Applicants are able to borrow between $1k and $35k, with an APR of 7.99%-35.97% There is also an origination fee of 2.9%-8%, which is deducted from the loan proceeds.LendingPoint also offers personal loans up to $25k. Interest rates range from 9.99% to 35.99%, with origination fees of 0%-6%.

How to Qualify for Business Debt Consolidation Loans

When it comes to filling out an application for a business loan, first of all, make sure you qualify for that particular loan. Requirements vary, depending on what factors the business credit card debt consolidation company, online lender, or bank considers in the application process.If you are applying for a business loan, you may be required to have been in business a minimum of two years. Some lenders, like traditional banks, will have more stringent requirements on credit scores, but if your personal credit score is 600 or higher, you should probably qualify. If you don’t have good credit, you may still qualify for options like merchant cash advances or invoice factoring.Another important factor is your debt-to-income ratio. While the number will vary, most lenders look for a ratio of 50% or less. And revenues for your business or your personal income (if you’re applying for a personal loan), will also likely be considered.Even if you don’t have high revenues or a great credit score, there are lending options that you may qualify for. But be aware that you’ll pay a premium in interest and/or fees to access these options. Be sure that the rate you qualify for is lower than what you’re paying on your current debts.

Why Take Out a Debt Consolidation Business Loan?

Making one monthly payment for your debt, rather than many, can simplify your business finances. And paying a lower rate may save you money. A business debt consolidation loan may also help get your credit back on track as you lower your debt, make on-time payments, and raise your credit scores.Looking for other small business loan choices?  Compare your options with SoFi today.
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Frequently Asked Questions

Can you consolidate business debt?
What are the disadvantages of business debt consolidation loans?
What is commercial debt consolidation?
What is small business debt consolidation?

About the Author

Susan Guillory

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
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