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Business Debt Consolidation

Business Debt Consolidation Loans

Juggling multiple business debts can be stressful and inconvenient, especially with different lenders, due dates and interest rates. A debt consolidation loan can help simplify outstanding debts by rolling them into one, saving your business money in the process.

What is debt consolidation?

Debt consolidation means taking out new credit to repay some or all of your existing debt, so you can focus on a single balance and repayment. Although this means taking out a single, larger loan, it could make sense if you’re already paying high interest rates on several smaller loans or credit balances.

How does a business debt consolidation loan work?

When you take out a business debt consolidation loan, you use the funds to repay your existing business debt. If you’re able to take out a loan with a lower interest rate this could save money and, if your monthly repayment works out less than your previous debts, it can ease pressure on your business and improve cashflow.

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How much does business debt consolidation cost?

The cost of a business debt consolidation loan comes down to the same factors as most other loans:

The interest rate on the new loan
Any fees added on as part of the agreement
Any exit or early repayment fees from your old debts.

You will be given the total cost of the loan as the APR, which includes the interest rate and fees on the new loan, but it might not include any exit fees so you will need to read the terms and conditions to check for these.

What types of business debt consolidation loans are there?

When you take out a business debt consolidation loan, you’ll generally have the same two options as with a standard business loan:

Secured loan: A secured loan means you’ll need to offer up an asset as collateral for your loan, which puts it at risk of seizure if you don’t meet your repayments. This added security means you may be eligible to borrow a larger amount at better rates.
Unsecured loan: An unsecured loan puts more weight on your credit rating, so they can be harder to qualify for and you may pay more interest. Although you won’t need to offer any assets as collateral, you may need to provide a personal guarantee.

» MORE: Types of business loan

What is refinancing?

Often confused with debt consolidation loans, refinancing means replacing one single loan with a new one, on better terms. Restructuring an existing loan in this way can result in a lower monthly repayment and a longer, or shorter, loan term that better suits your business needs. Unlike debt consolidation, you only need one existing loan to benefit from refinancing.

What are the pros and cons of a business debt consolidation loan?

It’s useful to consider the advantages and disadvantages of taking out a debt consolidation loan:

Advantages of a business debt consolidation loan

Your debt management becomes simplified with just one payment and one lender.
You could save money if you can get a new loan with a lower interest rate.
You can reduce pressure on your cash flow with lower monthly repayments.

Disadvantages of a business debt consolidation loan

You might not be able to find improved loan terms, as debt consolidation loans are more about simplifying your debt management.
Extending your loan term can increase the overall cost of the loan, even with lower monthly repayments.
You might end up out of pocket if you have to pay substantial prepayment fees.
There is extra risk to your assets if you have to take out a secured loan or put down a personal guarantee.

Is debt consolidation the best option for my business?

Debt consolidation loans can be a good option for your business if you have a number of debts that need managing, but it will only improve your situation if the following apply:

You’re able to reduce your overall interest rate, after you account for fees.
You are confident you will be able to keep up with the new repayment schedule.
You aren’t using consolidation as a way to run credit card balances back up again.

Are there other ways to relieve business debt?

If your business debt is becoming hard to manage, there are other alternatives to debt consolidation:

Liquidate assets: If you own valuable business assets, you may be able to raise cash by selling them, or by using asset refinancing to release funds.
Declare bankruptcy: If debts are genuinely unmanageable, bankruptcy or other formal insolvency routes might be an option, but these are serious steps with long-term consequences. If you’re even considering this, it’s wise to get professional advice early on.
Company Voluntary Arrangement (CVA): Another insolvency process, a CVA lets you consolidate unsecured business debts into a single payment without taking on new credit. You’ll need to propose a plan to your creditors with a licensed insolvency practitioner, who may or may not accept the offer.

The amount you’ll be able to borrow will depend on the lender, as well as your revenue/cash flow, credit profile, and whether you provide security for the loan. You can use our business loan calculator to see how much your business could borrow.

Lenders will typically look at your personal credit score, your business credit profile, the time you’ve been trading, and your annual revenue and cashflow to assess your eligibility. If you have a limited trading history or weak credit profile you may face higher rates and monthly payments.

You might be able to get a loan with bad credit, but it’s likely you will face higher interest rates or less favourable repayment terms.

Common alternatives to business debt consolidation loans include:

Going through an insolvency process for limited companies.
Refinancing an existing loan on better terms.
Asset refinancing to release cash tied up in business equipment or vehicles.
Restructuring with your current lender if possible by renegotiating terms.

You’ll often be able to repay your debt consolidation loan early, but check the terms to be sure. You might be able to save on interest but there will likely be early repayment fees to pay, which can cancel out the benefit.

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