Small Business Loan Consolidation: A Step-by-Step Guide

Your guide to conserving cash flow with a business debt consolidation loan.
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How to Consolidate Business Debt With a Loan

Business debt consolidation loans allow business owners to pay off several, smaller business loans with the proceeds of a single debt consolidation loan. Business debt consolidation loans help you refinance existing debt and allow you to gather all of your loan payments into a single repayment schedule. Beyond just consolidating your debt payments into one, small business consolidation loans can typically offer more ideal terms like less frequent payments and lower rates. 

Small business loan consolidation can make repaying debt a lot more manageable and affordable. In this guide, we’ll walk through exactly how business debt consolidation loans work, where to get the best, and whether or not they’re a good solution for your business.

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How Business Debt Consolidation Loans Work

Here’s the thing: business debt isn’t a bad thing. In fact, small business debt is often the best way to finance a business’s growth. According to the Small Business Administration, three-quarters of all small business funding comes from debt.

But, sometimes you take on financing that’s expensive when you need a quick business loan. While that might solve your need in the moment, your rates might be expensive long term. Your business has likely grown (and become more eligible for lower-rate products), and you could be wasting a lot of your cash flow to loan pages.

That’s where business debt consolidation comes in.

Business debt consolidation loans are for small business owners who are struggling with multiple repayment schedules for multiple business loans. Obtaining a small business debt consolidation loan can convert those multiple accounts and payments into a single loan product with a predictable interest rate and payment schedule consolidation allows for.

Instead of constantly trying to remember which loan payment is due on what day and worrying about whether you’ll have the cash on hand to cover the cost, you can take control of your business’s cash flow by tracking the single, predictable payment that business debt consolidation allows for.

Business Loan Consolidation vs. Refinancing

Sometimes, people use the terms debt consolidation and refinancing interchangeably. Although refinancing and debt consolidation are indeed similar, they’re not the same thing.

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With refinancing, the borrower takes out a new loan, at a lower interest rate, to pay off a higher-rate loan or loans.

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Debt Consolidation

The borrower takes out a new loan to pay off multiple existing loans.

Debt consolidation is a form of refinancing, but not all refinancing is debt consolidation. If you just replace one loan with a new loan at a lower interest rate, that’s refinancing but not debt consolidation. Debt consolidation converts multiple loans into one loan.

In addition, debt consolidation doesn’t necessarily result in a lower interest rate. Ideally, your business debt consolidation loan will save you money, but the focus of debt consolidation is to make payments more manageable by replacing several lenders with one. As such, you might not get a better interest rate.

This is why it’s imperative to be a smart borrower, work with a reputable lender, do your own research, and check your calculations multiple times. You want to make sure that consolidating business debt is the right choice for your business.

Business Debt Consolidation Loans: Your Top 5 Options

The best business consolidation loans—unsecured, secured, or otherwise—are long-term loans that help consolidate debt. This is because you want to make sure that each of your options are indeed longer-term than your current funding.

Other than that rule of thumb, your commercial debt consolidation loan options will depend on your specific situation. Your credit score, your business’s revenues, and the age of your business will all impact the business consolidation loans that are available to you.

Here are the best long-term debt consolidation loans for your small business debt:

1. Traditional Bank Loans

A bank loan is the best way to consolidate debt if you can qualify. Bank loans have the lowest interest rates and longest terms around, and they also lend large amounts of capital.

  • Term length: Typically around 10 years
  • Interest rates: Usually under 10%
  • Payment frequency: Monthly

Local community banks as well as national banks like Wells Fargo and Chase can assist you with consolidating debt. Just be aware that banks only approve the most qualified borrowers, so if you don’t have more than one year in business, a very strong credit score, and strong revenue streams into your business, then bank loans will be tough to qualify for. 

2. SBA Loans

After a traditional bank loan, the next best option for consolidating debt is an SBA loan. SBA loans are government guaranteed business loans, backed by the Small Business Administration. With SBA loans, the government guarantee’s a large portion of the loan, which in turn makes the loans more affordable and easier to qualify for than most other small business loans. 

SBA 7(a) loans, the most popular kind of SBA loan, go up to $5 million. The Small Business Administration (SBA) guarantees loans made by banks and other direct lenders. The guarantee can help you qualify where you might not otherwise have qualified for traditional bank financing.

  • Term length: 7 – 25 years
  • Interest rates: Starting at 6.75%
  • Payment frequency: Monthly

SBA loans, like regular banks loans, have long terms and low interest rates. But, also like regular bank loans, an SBA loan is still one of the most premium products, and you’ll need strong credit and business finances to qualify.

See If You Qualify for the SBA

3. Fundation

Fundation, a specific lender, is one of many online lenders that offer term loans that serve well for business debt consolidation. They provide loans of up to $350,000, so if that’s enough money to consolidate your business debt, this lender is worth learning more about.

  • Term length: 1 – 4 years
  • Interest rates: 7.9% – 28.9%
  • Payment frequency: Bi-monthly

Their rates aren’t as low as bank loan and SBA loan rates, but they are significantly more affordable than short-term loans. Fundation is also easier to qualify for than a bank or SBA loan. Fundation loans have a term of four years only, so make sure that’s enough time for you to pay back the loan.

4. Funding Circle

Another online lender on our top small business consolidation loans list, Funding Circle provides business loans of up to $500,000 with the following terms:

  • Term length: 1 – 5 years
  • Interest rates: 5.5% – 27.9%
  • Payment frequency: Monthly

With these more ideal terms, Funding Circle loans will be slightly tougher to qualify for than your average alternative small business loan, but they’ll still be much more accessible than SBA or bank loans.

5. Lending Club

Lending Club is another online lender that offers slightly less capital than Fundation and Funding Circle, going up only to $300,000. That might take Lending Club out of the running for borrowers who want to consolidate several mid-size loans. But if $300,000 in capital is enough for you, Lending Club has competitive terms that keep it in the running for our top business consolidation loans:

  • Term length: 1-5 years
  • Interest rates: 5.9% – 25.9%
  • Payment frequency: Monthly

If you’re looking to consolidate smaller business debt, then Lending Club could very well be your best option.

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Successful Business Debt Consolidation in 9 Steps

When you apply for a small business consolidation loan, be sure to follow these simple steps to ensure that you’re optimizing your debt consolidation:

Step 1: Identify Current Business Debts

Take a look at your existing business loans and the details of each, including the outstanding amount, the lender, the interest rate, the maturity date, and the payment schedule.

Step 2: Check for Prepayment Penalties

Remember that with a commercial debt consolidation loan you are getting one large business loan to pay off several smaller loans. Paying off the smaller loans before their maturity date could trigger prepayment penalties.

Prepayment penalties exist when the lender stands to lose money on interest payments they would’ve collected from you if you hadn’t paid the loan off early. Prepayment penalties can be expensive, so be sure to check for this before you pay a loan off to consolidate business debt.

Step 3: Determine Total Business Debt

Now that you have the details of each of your loans and any prepayment penalties, you should know which loans you want to combine into a single large loan. Add up all of this debt.

Step 4: Calculate Average APR

You’ll want to know the average annual percentage rate (APR) of your existing loans, so you know what interest rate your new loan has to beat. APR is not the same thing as interest rate. APR is the annualized interest of a loan, including all fees, and gives you an honest assessment of the cost of the loan.

Step 5: Search for a Business Debt Consolidation Loan

Now it’s loan shopping time. Visit your local bank, check out online lenders, and see what you qualify for to see if there are new loan options at your disposal.

Step 6: Compare APRs

Compare the APR of your old loans and the potential new debt consolidation loan. Get the APR on the new loan and see how it compares to the average APR on your current loans that you calculated in step 4.

Step 7: Decide Whether to Consolidate

Great news if the APR on the new loan is lower, but that’s not everything. The new loan might also have a much longer term, which means you’ll end up paying more in interest over the long run. You’ll need to figure out if the new loan makes sense for your business, given your specific finances and priorities.

Step 8: Pay Off Existing Debts

Sign the new loan agreement, and use the capital to pay off existing debts. In most cases, you’ll actually never see the money that goes to pay off your existing lenders. The new lender will divide up the money among your existing creditors. You now have just one lender, and this lender will start to send you statements.

Step 9: Make Payments on Business Debt Consolidation Loan

Now that you have your new consolidated loan, remain on good terms with the lender and avoid fees by making your loan payments on time.

If you follow those steps, you’ll be able to make an educated and informed decision as to whether or not your business will benefit from a business consolidation loan.

Business Debt Consolidation Loans: The Pros and Cons

Still not sure where your business stands? There are plenty of reasons that a business debt consolidation loan can be a great option for business owners. At the same time, these loans can harm your business’s finances in the long run—so it’s important to know the pros and cons before entering into business loan consolidation.

Business Debt Consolidation Loans: The Pros

Here are the main advantages to consolidating your business debt with a long-term loan:

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Conserve Cash Flow

For several reasons, you might be in a situation where you are juggling multiple loans and payments. Maybe you misunderstood the terms of your loans. Maybe you had to take out several short-terms loans at once to cover a cash flow emergency and are now feeling the effects.

In these situations, a business loan consolidation loan can bring some equilibrium back into your business’s finances and help you conserve cash flow. The new loan usually has a lower interest rate and longer term, which means smaller payments for you.

You may have also over extended yourself and fell victim to loan stacking. If you have multiple (sometimes even 8-10) high interest loans, then you may be in this situation. Typically, this happens if you’ve taken out a new loan to cover payments on a previous loan multiple times. Eventually, you may find that your business cannot sustain the debt. If you’re in this situation, you may face challenges in taking advantage of business debt consolidation. That said, this kind of loan can go a long way to help you save money if you qualify. 

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Tidies Up Repayment

Owing money to multiple lenders can be confusing for you when you maintain your books and financial statements. Sometimes, business owners have so many different lenders to contend with that they mistakenly miss payments.

In this case, a business debt consolidation loan can give you just one monthly payment and one creditor to deal with. One monthly statement makes it easier to pay on time and prevent yourself from falling even deeper into debt.

Business Debt Consolidation Loans: The Cons

For all their virtues, debt consolidation also comes with its fair share of notable downsides:

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Paying Interest on Interest

People like business consolidation loans because they have lower interest rates and reduce their payments, but that’s not the whole story. When you consolidate business debt, you’re paying down what you owe on your initial loans—principal, plus interest. This means that the interest that you’ll pay on your business debt consolidation loan will compound on the initial interest you owed. As a result, though an interest rate on a business debt consolidation loan might be lower than your initial debt, it will end up charging you interest on top of interest.

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More Interest Over Time

As a reminder, most business debt consolidation loans are long-term debt consolidation loans, so that means you’ll be paying interest over a longer period of time. That means you might pay more in interest over the life of the loan, even though the interest rate is lower. The total cost of capital for long-term debt consolidation loans can be more than for the loans that business owners consolidate them with.

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Not Necessarily a Cure-All

A business debt consolidation loan might temporarily help you conserve cash flow, since the installment payments are lower. But, as tough as it is to face, you may be in this situation because you borrowed more than your business could repay. A business debt consolidation loan may well lower your monthly payments, but if your business faces a setback, then you might find yourself back where you started (or worse, if the consolidation lender charges penalties for late payment).

When a Business Debt Consolidation Loan Is Right for You

We list out eight indicators that small business loan consolidation may be the right fit for your situation. Do one, or more, of these signs apply to you and your business?

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You Have Multiple, High-Interest Loans

If your current loans already have low-interest rates, it’s unlikely that business debt consolidation will benefit your business. In general, the higher your interest rates on your current loans, the more beneficial small business debt consolidation will be.

Even with business debt consolidation loans, the interest rate you can qualify for will depend upon certain factors, including your personal credit score, your business’s annual revenue for the previous 12 months, and the amount of time you’ve been in business.

If one or more of those factors have stayed the same or improved since the last time you applied for a loan, it’s possible you could get a better interest rate with business debt consolidation.

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You Have Short-Term Loans You’d Like to Extend

If you have multiple short-term loans that you’d like more time to pay off, you might be able to consolidate your business debt into one multi-year term loan—or at least a loan with longer terms than your current contracts have allowed.

Business owners take out loans with the expectation that they’ll contribute to growth in the business’s profits. If you need a longer time to realize your return on investment, business debt consolidation can be a great way to buy yourself some more time before you have to fully repay the debt.

Keep in mind, though, that this purpose for debt consolidation can easily create an expensive and dangerous cycle. Make sure that the revenues you’re counting on will be enough to cover the full amount of the loan—including additional interest that will accrue.

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You Have Solid Personal Credit

When you consolidate debt, you are asking the lender to grant you one large loan to cover all the smaller loans you have now. In order to grant you a large amount of money, the lender will expect you to have good personal credit. Your credit has significant impact on the interest rate and terms that the lender will offer you.

What’s a good credit score? Here are some guidelines to keep in mind.

  • 700+ is considered an excellent credit score. You’ll definitely have options to lower your interest rate.
  • 620-700 in combination with a few years in business is a good credit score. You might have options to lower your interest rate.
  • 550-620 is an ok credit score. It’s unlikely (but still possible!) that you will be able to lower your interest rate.

A personal credit score can be a big determining factor in whether or not you can lower your interest rate with small business loan consolidation.

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Your Business Finances Have Improved

If your business’s profitability or revenues have improved, you might qualify for a lower interest rate when you apply for a business debt consolidation loan. Any time your revenue or profitability has increased for 3 consecutive months, you might be eligible for lower interest rates on your loans.

The minimum business revenue for consolidating your debt is usually around $25,000, and you should have a debt service coverage ratio of at least 1.2.

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Your Personal Finances Have Improved

When you’re a small business owner, your personal finances are just as important as your business finances for getting a small business loan.

If you’re looking for a business debt consolidation loan and have improved any of the following aspects of your personal finances, you might be eligible for a lower interest rate:

  • Higher personal income (from sources other than the business)
  • Lower personal debt
  • More equity in real estate
  • Fewer dependents
  • Reduced household spending

Any of these factors could make it easier to receive a lower interest rate on a business consolidation loan.

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You’ve Passed the 1-Year-in-Business Threshold

Time has passed since you applied for your original loans, and that’s a good thing. A longer time in business will help you receive a lower interest rate on a business debt consolidation loan.

Businesses that have operated for longer periods of time have longer financial histories and proof of profitability and success. This goes a long way when you’re applying for a business debt consolidation loan. Your business should be at least 1 year old before you can be eligible for a business debt consolidation loans.