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Understanding Business Debt Consolidation Loan Options

Understanding Business Debt Consolidation Loan Options
Susan Guillory
Susan GuilloryUpdated April 22, 2023
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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 and negatively impact your cash flow.Small business debt consolidation essentially allows you to combine all your debts into one loan that you pay off at one (ideally lower) fixed rate and with only one payment per month. This can potentially shorten your repayment periods, reduce your monthly payments, or both. However, business debt consolidation isn’t right for all small businesses. Here’s what you need to know.

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 use the proceeds to pay the balances you owe on your other business debts. You then only make payments on the new loan.A business consolidation loan, just like other types of business financing, 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. It can also simplify your payments. 

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 help you build a positive personal or business credit history over time.
  • A lower monthly payment can help free up cash that you can use to cover day-to-day operating expenses. 
Cons of debt consolidation loans:
  • When you apply for a new loan, it can have a temporary negative impact on your credit.
  • 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. 
  • You could end up with a longer repayment term. While that can lower your monthly payment, you can end up paying more in interest over the course of the 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?

Applying for a debt consolidation loan will trigger a hard credit inquiry, which can have a temporary negative impact on your credit. Over time, however, you may see an improvement in your (or your business’s) credit score, since your credit reports will reflect that you paid off your outstanding debts, as well as your on-time monthly debt consolidation loan payments.Recommended: Debt Consolidation vs Credit Repair

When to Consider Consolidating Debt

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 might 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. To do this, you’ll need 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, you would divide 7,500 by 50,000 and get 0.15. This 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 small business 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 available. 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

Traditional bank loans typically offer the most competitive rates and terms. However, they can be difficult to qualify for and often require several years in business, excellent credit, and a certain minimum annual revenue. If you’re interested in exploring a business debt consolidation loan from a bank, the bank you already have a relationship with might be a good place to start.

Alternative Business Loan

If you don’t qualify for financing your debt consolidation with a bank, consider alternative lenders, as they tend to have more flexible qualification requirements. Some online lenders will work with businesses that have as little as six months of business history and less-than-excellent credit, and may not have a specific minimum for annual revenue.

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. Just keep in mind that many lenders don’t allow you to use a personal loan for business purposes. You’ll want to check into any restrictions about how you can use the proceeds of the personal loan before applying.

How to Qualify for Business Debt Consolidation Loans

Before filling out an application for a business loan, you’ll want to make sure that you qualify for that particular loan. Requirements vary, depending on the lender. You may need to have a certain number of years of business history, a minimum personal or business credit score, and a certain minimum amount of annual revenue. Lenders may also look at your debt-to-income ratio (DTI), which is how much of your small business’s monthly earnings go to repaying your existing debts. 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 likely pay a premium in interest and/or fees to access these options. You’ll want to 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?

Consolidating your business debt with a new business loan could help shorten your  repayment periods, reduce your monthly payments, and/or lower your overall borrowing costs. The higher the interest rate you’re paying on your existing business debts, the more money a debt consolidation loan can potentially help you save. Making one monthly payment for your debt, rather than many, can also simplify your business finances. If you’re interested in exploring your small business loan options, Lantern by SoFi can help. With our online debt financing marketplace, you can explore loan options without scouring the web or making any type of commitment. With one short application, you’ll be matched with a loan offer that meets your company’s needs and qualifications.Let Lantern help you find the right financing solution for your small business.

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

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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