Business debt consolidation combines all your loans into one, which can lower your interest rate and decrease your risk of accidentally missing a payment. However, debt consolidation isn’t for everyone. Before you combine your loans, learn how debt consolidation works and its benefits and risks.
Business debt consolidation is similar to personal debt consolidation. By consolidating all your business loans into a single loan, you will have one payment and may be able to decrease your interest rate, making your debt easier to manage.
Consolidation is recommended for business owners who feel overwhelmed with making payments to multiple creditors every month. Having to worry about only a single payment can help you budget expenses, making you less likely to miss a payment, which could hurt your credit score.
When consolidating loans, consider the amount of debt relief you need, because the loan should cover all your debts. For instance, if you’re approved for a consolidation loan for $10,000 but you have $25,000 in debt, it won’t make sense to consolidate.
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Consolidating your debt can lower your monthly loan payments, but it can also cause a temporary dip in your business credit score. When you apply for a debt consolidation loan, the lender will make a hard inquiry on your credit, lowering your credit score by a few points.
However, if you pay your bills on time, you should regain the credit score points quickly. If you need to lower your annual percentage rate (APR) and monthly bills, a temporary dip in your credit score is worth the long-term goal of improving your finances.
Consolidating your debt into one loan may also help you get approved for future loans. When lenders look at your credit history, they don’t like to see a list of various loans. If you think you might need an additional loan soon to support growth or sustainability, business debt consolidation can help you clean up your credit report.
Since debt consolidation is one of the many ways you can use a business loan, there is virtually no difference between the two.
A debt consolidation loan is a business loan you’ve designated for paying off other high-interest debts. By using the loan to pay off your existing business debt, including credit card balances, you simplify your finances, replacing multiple payments with one fixed monthly payment.
Still, there are minor differences between business debt consolidation and a loan. Here’s a summary.
|Business debt consolidation||Business loan|
|Type of loan to pay off other high-interest debts||Type of loan for virtually every possible business funding need|
|Combines multiple payments into one fixed monthly payment||Adds another separate payment to your expenses for each business loan|
|Leads to an overall better interest rate||Cumulates more interest with each business loan you take out|
If you have good credit and a moderate amount of debt, consolidating your business loans can save you money in interest over the long term. It can also streamline your monthly payments so that you have only one payment each month.
Before consolidating, make an honest report of your finances. Determine what debt payment you can comfortably make every month with your current cash flow. Look at your monthly financial obligations, and see where you can afford to cut business costs.
Consolidating business debt is effective only if you change your spending habits. By recognizing your spending triggers and seeking financial advice from your accountant, you can save your business from running into the red.
Business debt consolidation can’t fix poor spending habits. Don’t use it in place of smarter planning.
It’s wise to consolidate debt when you’re feeling overwhelmed with tracking multiple payments, but there are other excellent reasons to pursue debt consolidation.
Here are some good and bad uses of business debt consolidation:
|Reason to consolidate||Good use||Bad use|
|Lower your interest rate||Yes||No|
|Shorten your loan repayment term||Yes||No|
|Spend more money||No||Yes|
While you can technically consolidate your business debt multiple times, the consolidation process isn’t the hard part. Recognizing that you have an overspending issue is the first step in getting a handle on your debt.
Using any form of debt consolidation to bandage a larger debt so you can continue to spend won’t solve any problems. If you don’t reflect on how you accumulated your debt, you will fall back into the same habits and potentially get into a financial hole you can’t climb out of.
You can get back on track by creating a budget, tracking your spending and mentally preparing for any spending hiccups. Once you pay off your debt in full, consider depositing the money you were previously paying on your loan into a business savings account. You can then use that account to pay for unexpected expenses upfront, saving you time and avoiding the fees of obtaining another loan.
When applying for a small business loan, make sure you understand your credit profile, prepare your financial statements, and research your lender thoroughly.
As with any loan, you must carefully consider the costs and risks of debt consolidation. Here are eight factors to consider.
Debt consolidation can take many forms, including traditional business loans from banks, SBA loans, alternative lending and business credit cards; some business owners even take out personal loans. No matter which you choose, though, small business loan fees are commonplace.
Consider all fees when deciding whether consolidation will help your business pay off its debts. Fee types and amounts vary by lender. Here are some fees to look for before accepting a loan:
Lenders evaluate whether small business owners should be approved for business debt consolidation based on the following factors.
This table offers a summary of leading debt consolidation options:
|Loan type||What is it?||Why is it good for consolidation?||Top picks|
A loan offered by a private company that lasts several months to years
|Accessible and wide variety|
Fora Financial (short term), SBG Funding (flexible terms), Biz2Credit (marketplace lender)
|SBA loan||Government loan||Low interest rates||Truist|
|Alternative loan||Merchant cash advance, business line of credit, invoice factoring||Easier application requirements||Fundbox|
When you face debt from multiple creditors, it can feel unbearable. In some instances, business debt consolidation may simplify your payments and reduce your interest rate. Carefully research your options to ensure a business debt consolidation loan is the best solution for your business.
Max Freedman contributed to the writing and research in this article.