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Business Debt Consolidation: How Does It Work?
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Business debt consolidation can bring all of your business loan debt under one roof. This simplifies the repayment process and potentially lowers your interest rate, providing much-needed relief.
But it also means you might be paying off that debt for longer, which could eat into that savings or even drive up costs over time. A business debt consolidation loan could be worth if for the convenience of one monthly payment. We’ll help you decide if this is the best option for you to manage your outstanding obligations.
Where to find business debt consolidation loans
Business consolidation loans are available from traditional banks as well as alternative, online business lenders. Online lenders generally have more lenient eligibility requirements and faster time to funding than banks, but banks may offer lower rates and better terms. Be sure to watch out for high rates that could offset the amount of money you’d save through business debt consolidation.
Here are a few lenders offering business consolidation loans that may provide financial relief for your business.
- Starting at $5,000
- Fixed or adjustable rates
- 12– to 84-month terms
If your business qualifies, a business consolidation loan from a bank could be your best option to secure a lower rate and better terms. Chase Bank offers small business term loans starting at $5,000 that can be used to consolidate business debt. Chase’s terms range from 12 to 84 months and rates are fixed or adjustable, though not disclosed online. Large national banks tend to charge annual interest rates between 1.20% and 7.83% with fixed monthly payments. Keep in mind that banks typically require extensive documentation from applicants and may review your bank statements, credit report, business plan and financial statements, among other information.
- $5,000 to $500,000
- Rates not disclosed
- Terms between 6 months and 60 months
Funding Circle, an online lender, offers term loans from $5,000 to $500,000 for business debt consolidation. Terms range from 6 months to 60 months with a monthly repayment schedule. Funding Circle doesn’t publicly disclose rates, but it does provide a loan calculator to help you estimate the cost of financing. Based on the calculator, a $150,000 loan with 24-months terms could have an APR of about 6%, including Funding Circle’s 3.49%–7.99% loan origination fee. To be eligible, businesses need at least two years in business and a personal FICO score of at least 660.
- $30,000 to $5,000,000
- Rates starting at 4.75%
- Terms from 24 to 300 months
SmartBiz is an online lender that offers bank term loans and SBA loans, which are backed by the U.S. Small Business Administration (SBA) and typically issued through banks. Among the various types of SBA loans are 7(a) loans, which can be used for business debt consolidation. The 7(a) program is the SBA’s primary funding option for general business expenses. The SBA caps interest rates that lenders can charge with repayment terms between 120 and 300 months, depending on the use of loan funds. If you’re seeking a lower rate when consolidating business debt, an SBA loan through SmartBiz may be a desirable option. However, an SBA loan may be difficult to obtain without a personal credit score of at least 680.
How does business debt consolidation work?
To consolidate debt, business owners need to take out one new loan to pay off all of their existing debt. Rather than make separate payments on multiple business loans, you could streamline the process and make a single monthly payment. The new loan may have a lower interest rate and a longer repayment term than your previous loans, giving you more time to pay off debt with smaller payments.
Business debt consolidation could provide relief if you find a low-interest loan that can replace several high-interest loans. But you would still owe fees to the new lender, such as an origination fee to process the new loan. Make sure a debt consolidation loan saves you money and isn’t more expensive than your current financing.
To manage the process of consolidating business debt, follow these steps to make sure it’s the right move for your small business:
- Make a list of each loan balance to figure out what you owe.
- Calculate the average interest rate across your current debt.
- Set a purpose for your consolidation loan — such as lowering your rate, lowering your payment or simplifying your repayment process — and stick to it.
- Gather required documentation for a loan application, such as a profit and loss statement and cash flow forecast.
- Compare consolidation loans from multiple lenders to find a low rate that will save you money.
Business debt consolidation example
Imagine Sam Smith owes four different debts with four different lenders, each at a different interest rate. Sam’s debt load could look like this:
- Debt 1: $51,000 at 19% APR
- Debt 2: $2,000 at 11% APR
- Debt 3: $11,000 at 11% APR
- Debt 4: $1,500 at 18% APR
Total Debt: $65,500
Average Interest Rate: 14.75% APR
Let’s say Sam consolidates these debts with an SBA 7(a) loan and scores an interest rate of 9.25%. In one fell swoop, Sam goes from managing several high-interest debts every month to paying a single loan payment of $838.61 per month for 10 years, not including fees. Your accountant can give you advice if you’re having trouble comparing existing rates and terms to see if consolidation is a good fit for you.
Business debt consolidation vs. refinance
Refinancing business loans is another debt-relief solution, but it differs from debt consolidation. Business debt consolidation involves taking out one new loan to pay off multiple loans, while refinancing refers to taking out a new loan to pay off one single loan.
If you have several debts to repay, you’d likely turn to debt consolidation. If you want to replace one existing loan with a new loan that may have better rates and terms, you would typically refinance your debt rather than consolidate.
Both options are designed to help you manage your debt and possibly secure a lower interest rate and longer repayment terms. The amount of debt you currently have would be the deciding factor in whether you pursue consolidation or refinance. You may be able to refinance your loan with your current lender.
A third way to manage business debt is to work out an arrangement(s) with your current creditors. You may want to consider writing a hardship letter when submitting your request. This document would reflect why you need to restructure your business debt, including financial statements to reinforce your claims. Being open about your circumstances could help your case.
Business debt consolidation: Pros and cons
Although business debt consolidation can streamline your repayment process, borrowing funds may come with downsides. Here are a few benefits and drawbacks to consider before moving forward with a debt consolidation loan.
- Presents an opportunity to lower your rate and secure longer terms.
- A single lender would handle your debt rather than several creditors.
- Money saved through debt consolidation could go back into the business.
- Longer terms on a debt consolidation loan might mean paying more in interest over time.
- Comparing your original debt schedule to your new rate and terms may require some outside help to determine if it’s a good deal or not.
Can you consolidate business debt?
Yes, you can consolidate business debt with a business debt consolidation loan. This loan would allow you to combine multiple outstanding balances into one loan balance. You may be able to get a lower rate and a longer amount of time to repay your debt.
Are debt consolidation loans worth it?
Obtaining a business debt consolidation loan may be worthwhile if it would save you money. You may be able to repay a debt consolidation loan at a lower rate than you’re currently paying. But watch out for loan fees and penalties that could increase the cost of a consolidation loan in the long run.
What is the best debt consolidation company to use?
Business owners can apply for debt consolidation loans from banks or online lenders, and which one you choose may depend on your business’s eligibility. Bank loans typically have strict eligibility requirements, but often come with favorable rates and terms. Online loans are generally easier to qualify for than bank loans, but could come with higher rates and fees. Consider your business’s circumstances when making your decision.