How to Restore Your Business’s Cash Flow With Debt Consolidation

Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

Managing business debt is always a challenge. But if you’re juggling multiple outstanding loans and payments? That challenge can quickly become a never-ending cash flow nightmare. Debt consolidation can help you face and solve this nightmare.

It’s easy to get stuck in a constant cycle of payments due on several business loans. But there may be a solution to restore your business’s cash flow—and your sanity. It’s called debt consolidation, and if used correctly, it can potentially save you thousands of dollars in interest costs.

But as with all things in lending, all debt consolidation loans are not created equal. We’re breaking down the facts about what debt consolidation is, who it’s for, and how to choose the best debt consolidation option for your business.

What is Debt Consolidation?

Simply put, debt consolidation is the process of taking out a single loan to pay off several existing loans. By consolidating their debts, businesses can replace multiple payments with a single, consistent monthly payment. In addition to the convenience, this process can allow borrowers to reduce their interest payments and change the timeline for paying off their debt.

The Difference Between Debt Consolidation and Refinancing

You’ll often hear debt consolidation used in tandem with another term: refinancing, or debt refinancing. Sometimes borrowers and even lenders will use these terms interchangeably. But while they do share similarities, debt refinancing and debt consolidation are not the same.

Through refinancing, a borrower takes out a new loan at a lower interest rate to pay off an existing loan at a higher interest rate. Debt consolidation, on the other hand, refers specifically to the process of refinancing multiple loan products into a single new loan product.

Refinancing – Taking out one new loan to pay off one existing loan.

Debt Consolidation – Taking out one new loan to pay off multiple existing loans.

So, debt consolidation is a form of refinancing, but not all refinancing is debt consolidation. Make sense?

Reasons You May Need Debt Consolidation

We find that most borrowers who come to Fundera looking for debt consolidation fall into one of three categories. The category you fit into can have a big impact on how easily you’ll qualify for debt consolidation or refinancing, and what interest rates will be available to you.

Here are the three scenarios we most commonly see:

1. Misunderstood the Original Loan Terms

When you consider the many different types of interest rates, loan terms, fees, and amortization schedules offered by different alternative lenders, it’s no wonder that borrowers frequently find themselves committed to loans with terms they don’t  fully understand. The loan’s effective APR may be far more expensive than you imagined. Or, on the other hand, maybe daily amortizing payments are causing a larger dent to your cash flow than you can handle.

Whatever the reason—if you’re reeling from the effects of taking on business debt you didn’t fully understand, you’re not alone. And this problem compounds if you have multiple high-interest loans to contend with.

Now that you know better, you may be able to refinance or consolidate those high-interest debts. By doing so, you’ll get a single loan with a lower effective APR and more manageable payments. Just make sure to use a loan amortization schedule and an effective APR calculator to ensure your new interest rate is actually saving you money.

2. Got Caught In a One-Time Jam

On the other hand, maybe you knew exactly what you were getting into when you took out one particularly high-interest loan—but it just couldn’t be avoided.

Whether because of an emergency expense, a client who didn’t pay, or any other cash flow issue, business owners occasionally get into a situation where they just need cash fast, no matter the cost. In those situations, you do what you have to for your business—and sometimes that means taking on expensive debt.

Now that the emergency has passed and you have more time to shop around, you might choose to refinance that high interest debt—along with any other outstanding loans—into a single payment at a more reasonable interest rate.

3. Over-Leveraged With Many Sources of Debt

Finally, we occasionally talk to borrowers who’ve simply found themselves totally over-leveraged, with 7-10 or more short term loans, all at exorbitant interest rates.

Unfortunately this last scenario is the most heartbreaking to see because there’s usually not much we can do to solve the problem. Borrowers in this scenario typically have low personal credit scores and their businesses are in a bad cash flow situation. this ultimately makes it very difficult to qualify for anything but a high-interest short-term loan.

Are You a Good Candidate For Debt Consolidation?

Does your story sound like one of the three above? Or maybe you have a different reason for consolidating your debt. Either way, here are the main characteristics that would make you a good candidate for debt consolidation.

You have multiple loan products outstanding

As we mentioned above, debt consolidation is specifically for borrowers who are currently paying off more than one loan product and want to condense that down into a single monthly payment.

You currently have high-interest loans and want a lower-interest option

If your existing loans already have relatively low-interest rates, it’s less likely that you’ll get a better rate by consolidating. Generally, the higher the interest rates on your existing loans are, the more likely you are to get a better interest rate by consolidating.

Of course, the interest rate you qualify for will depend on several factors. Lenders will look at your credit score, annual revenue, and time in business to determine what rates you qualify for.

You currently have short-term loan products and want to extend your payments

Do you have multiple short-term loans that you need more time to pay off? If you qualify, consolidating with a multi-year term loan can help you extend those payments and improve your business’s cash flow.

You have a strong personal credit score

As always with loans, your personal credit score will weigh heavily in determining whether you qualify for a lower interest loan to consolidate your debt. If your interest rate is on the lower end, it may be difficult to qualify for a better loan product than what you already have.

In general, a credit score of 700 or above is considered excellent. If your score is 620 or above and you’ve been in business for more than a year, you should still have some lower interest options. While a score in the 550-620 range will give you some options, you may have a tough time lowering your interest rate compared to your existing loans. If your credit score is under 500, it will be very difficult to refinance or consolidate your current debt.

Consolidation makes financial sense for your business

Only you have a full understanding of your business’s finances, including your current cash flow, expenses, revenue, and future potential. Do your research to make sure you understand the ins and outs of both your existing loans and your debt consolidation options, then make the decision that’s in the best financial interest of your business, both immediately and in the long term.

But how exactly do you make a smart decision about debt consolidation? We’ve broken that down below!

Ten Steps to Smart Debt Consolidation

Going about debt consolidation the smart way takes more than just accepting the first consolidation option you qualify for. As a business owner, it’s critical that you do your homework. This will ensure that you’ve chosen a loan product that is in the best long-term interest of your business.

To simplify the process of smart debt consolidation, we’ve broken it down into ten straightforward steps. Read on to learn both how to qualify and how to evaluate the pros and cons of debt consolidation for your business.

STEP 1: Identify All Your Existing Business Debts

If you’re looking into debt consolidation, you’ve probably already done this first step. It’s easy to identify all of the existing business loans you currently have outstanding when they weigh on your mind so heavily. To calculate the total amount you’ll be consolidating, determine how much you currently owe on each loan. Be sure to keep in mind that you could incur fees if you pay them off as a lump sum today.

Your lender should be able to provide you with this information. Or, for regularly amortizing loans, a loan amortization schedule can help you identify your total amount currently owed. If you don’t have a loan amortization schedule for your existing loans, you can create one using Fundera’s free downloadable templates for daily, weekly, and monthly amortizing loans.


To determine the total amount you currently owe, go to the “ending balance” column on your loan amortization schedule. Then, find the row corresponding to your most recent payment. This is the total amount you would need to pay to close out your loan today.

You’ll need to complete this process for each of your existing loans. Finally, add these numbers together to calculate your total outstanding debt.

STEP 2: Check for Prepayment Penalties

Some lenders have loan agreements that include penalties for early payments. These fees can be hefty, making debt consolidation less cost effective than it otherwise would be. Before making a decision to consolidate your debt, double check your existing loan agreements for any penalty clauses. Keep this in mind as you weigh the pros and cons of debt consolidation.

STEP 3: Determine the Total Amount You Want to Consolidate

As mentioned in step one, you might be charged a penalty for paying off an existing loan early. Be sure to add that number from the total amount you currently owe to determine the total amount of outstanding debt you want to consolidate. This is equivalent to the total loan size you’ll need in order to pay off your existing debts.

STEP 4: Calculate the Effective APR of Each Existing Loan Product

Not all interest rates are created equal. Differences between loan terms, amortization frequencies, simple versus compounding interest, and other factors can often mean that two interest rates look comparable on paper, but are actually not all the same.

Use an Effective APR calculator to make sure you’re comparing apples to apples. Fundera offers Effective APR calculators for virtually every type of small business loan. The APR calculator makes running the numbers simple. Enter the information from your existing debts and your new potential loan to calculate the Effective APR of each. Keep in mind that if you’re consolidating multiple loan products of different types, you may need to use a different type of calculator for each.

Once you’ve calculated the Effective APR from each loan product, you’ll be better prepared to determine whether taking out a new loan to consolidate your debt will be financially beneficial in the long term.

STEP 5: Shop for New Funding Options

Finally, you’re armed with all the information you need about your existing loans. Now you’re ready to shop for a new loan to consolidate your debt.

There’s a wide array of options available—from an SBA loan, to a term loan from a bank or alternative lender, or even to a short term loan. As with any loan product, your ability to qualify will depend on your personal credit score, the annual revenue of your business, and other considerations.

Your options don’t end there. Choose how you want to shop your options. You can contact lenders directly to apply. Alternatively, you can work with a brokering firm like Fundera to help you evaluate your options. Just remember what you’re looking for. You want a loan approximately equal to the total amount you currently owe, plus any prepayment penalties, ideally with a lower APR than your existing loans.

Again, the point here is not just to accept the first loan you’re approved for. Do your due diligence to make sure you’ve found a smart option before signing the dotted line. We’ll help you do that in the next two steps below.

STEP 6: Compare Effective APR Between New and Existing Loans

Remember those APR figures you calculated back in step four? Now’s the time to compare those numbers to the APR of your potential new loan. If the lender or commercial loan broker you’re working with hasn’t disclosed the APR, go back to Fundera’s calculators to calculate the effective APR for your new loan option.

By comparing apples to apples,you will realize whether this new loan option is a smart financial choice.

STEP 7: Use a Loan Amortization Schedule to Make an Informed Choice

Even after you’ve compared effective APR, differences in your loan terms can have some impact on the total cost of your loan. For example, an effective APR of 50% on a six month short term loan may actually have a lower total interest cost than a five-year loan with an effective APR of 40%, due to the length of time the debt will be outstanding.

To compare total costs, you’ll start by creating another loan amortization schedule for your new potential loan. This process will mirror the calculations for your existing loans that you did in step one.

On each amortization schedule, calculate your total cost of borrowing using the “total interest” number in the top right-hand corner. This is the total amount that you would pay in interest over the life of each loan according to the original payment schedule.

First, sum up the “total interest” numbers from each of the existing loans you’re consolidating. Then compare that total to the “total interest” number from your new potential loan. This is a solid estimate of your total cost of borrowing. The estimate will show you whether debt consolidation will ultimately save you money, or cost you more in interest.

Of course, there are situations where your total cost of borrowing through consolidation is actually higher, but it’s still the right decision for your business. Consolidating might help you stretch out your payments and improve your immediate cash flow. In this case, it may be worth the extra cost.

Ultimately, it’s a financial decision only you can make for your business. Our only goal here is to help you understand this potential trade-off before you…

STEP 8: Sign the Dotted Line

Finally! By following all the steps above, you’re armed with all the information you need. Now you can make a smart decision about consolidating your debt.

Are you confident that the comparative APR and total cost of borrowing for your new loan make debt consolidation worthwhile for your new business? Great! You’re ready to sign that dotted line.

STEP 9: Use Capital to Pay Off Existing Debts

So you’ve qualified for your new funding and signed the dotted line. Now you’ll receive a lump sum of cash from the lender. You’ll immediately use that cash to pay off each of your existing debts with a lump sum payment. For each loan, you’ll pay the “total amount due” that you identified in step one above.

After you’ve made each lump sum payment, you’ll be able to immediately close out those loans. Then you will have consolidated your multiple loan products into just one outstanding loan with a single regular payment.

STEP 10: Follow Through With Your New Payment Schedule

Here we are! It’s both the easiest and the hardest part of the whole debt consolidation process. You’ve made your decision and proceeded with debt consolidation. Now, you’ll need to follow through with making your regular payments for your new, consolidated loan.

We know seeing your hard-earned revenue go out the door is never fun. Nonetheless, keeping up with one regular debt payment is easier than juggling multiple different payments. Plus, you know there’s a light at the end of the tunnel!

Know Before You Owe

Remember, just because you can qualify for debt consolidation doesn’t necessarily mean it’s the best option for your business. Unfortunately, we frequently see cases where borrowers have attempted to consolidate and refinance their high-interest loan products, only to end up with an even higher interest rate than what they had before.

Some lenders are less than clear when communicating the relative interest rates of different loan products. As such, it’s critical that you know your rights as a borrower, work with a reputable lender or broker, and do your own research and calculations. If you follow the steps above, you’ll go to sleep at night knowing that consolidating your debt was actually the smartest choice for your business.

And remember—if you need any help in the process, Fundera’s team of trusted lending experts is always just a phone call away.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

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