Business Debt Consolidation: How It Works and Best Loan Options

How business debt consolidation works

How to consolidate business debt

1. Determine how much you owe

2. Evaluate your qualifications

3. Compare business debt consolidation options

• Bank loans. These loans typically offer the most competitive rates and terms. Bank business loans can be difficult to qualify for, however, requiring several years in business and excellent credit. These loans can also be slow to fund.
• SBA loans. If you can’t qualify for a bank loan, SBA loans are a great alternative, offering low interest rates and long repayment terms. Although these loans partially guaranteed by the U.S. Small Business Administration can be a little easier to qualify for, SBA lenders still usually require good credit and multiple years in business. And, like bank loans, SBA loans can be slow to fund.
• Online loans. These loans may be a good option for newer businesses or those with fair or bad credit. Online business loans typically have flexible qualification requirements, although this can result in higher interest rates and shorter repayment terms. These loans tend to fund much more quickly than bank and SBA loans, however, often in days.

4. Gather documentation and apply

• Basic information about you and your business.
• Personal and business bank statements.
• Personal and business tax returns.
• Business financial statements.
• Existing debt schedule.

5. Close the loan and pay off existing loans

Pros and cons of business debt consolidation

Pros

• Simplified payments. By combining all of your existing debts into a single loan, it’s much easier to manage your finances and loan payments. Instead of having to make several payments and deal with different lenders, you have to make only one payment to one lender every month.
• Lower interest rates and monthly payments. Although this isn’t always the case, you may be able to secure a lower interest rate and decrease the amount of your monthly payments by consolidating your debt.
• Improved cash flow. Ideally, a lower monthly payment should help free up cash that you can use to cover day-to-day expenses. Similarly, a lower interest rate should save you money that you can use for other business purposes.

Cons

• Longer repayment terms. Although longer repayment terms can lower your monthly payment and make repaying more manageable, you will be accruing interest over a longer period of time. So even if you have a lower rate, you could still end up paying more in interest over the course of the loan.
• Lower rates are not guaranteed. When you apply for business debt consolidation, you’re not guaranteed to receive a loan with lower interest rates than what you’re paying now. If you can’t access better rates, a consolidation loan may not be the right option for your business.
• Additional fees. You may have to pay additional fees when taking out a debt consolidation loan — which can affect the potential money you save by consolidating. Your existing lenders may charge prepayment penalties for repaying early, and most credit cards charge fees for transferring your balance. You may also have to pay an origination fee on your new loan.

Find the right business loan