Consolidation is when you take out one new loan to pay off all your existing loans and credit cards. The point is to get a lower rate, or better terms. If you borrowed when rates were high, or you went with an expensive short-term funding option, refinancing could lower your monthly payment and help cash flow. If you’re stuck paying a cash advance every day, you will also replace daily payments with once per month payments, so yes it can make things easier.
Best for Consolidation
Different lenders are best for different types of business financing. Fundera tops the list of the best online business loans, and Lendio comes out on top as the best loan marketplace. Chase has the best term loans, Huntington National Bank has the best SBA loans, Bank of America has the best rate discounts, Credibly is best for a low credit score requirement, and OnDeck has the best short-term consolidation loans. But there is no single best lender for all businesses; it all depends on the business’s credit score, how long it has been in business, and its business goals.
Term loans and SBA loans are the best for consolidation because they offer the most competitive rates and longest repayment terms. You can apply like you would for any business loan and qualify on revenue, credit score, and time in business. Once you’re funded, you pay the loan back in fixed payments of principal and interest. You may be able to pay the loan off early but check for prepayment penalties.
How do you compare loans? Interest rates are the first thing to look at, which means the APR. If you’re doing a refinance, a new loan must have a lower rate than your old loans. A longer repayment period will mean lower monthly payments, but more interest overall. Some lenders take out an origination fee at the beginning, anywhere from 0.05% to 10%, and it’s higher if your credit is worse. (That’s why we tell you to look at the APR, not just the interest rate.) And always read the agreement to make sure there are no prepayment penalties, late fees, or monthly admin fees. Online lenders will often fund your loan more quickly than a bank or credit union.
The Risks Involved
The upside is real. Owners often take out high-interest debt in the early years and once established can get a lower rate and pay less interest overall. Replacing a merchant cash advance, which requires daily or weekly payments, with a new loan could mean a lower APR and lower monthly payment, which preserves cash flow. There’s only one loan payment a month instead of tracking multiple daily or weekly payments. It also frees up credit-card and credit-line limits, but that means you’ve got more debt to repay. On-time payments may raise your credit score.
But beware of the risks involved. First, while a refinancing may lower your monthly payments, the total debt doesn’t change, it’s just that a different company is collecting. If you take out a longer-term loan, your total cost goes up. Nearly all business loans come with a personal guarantee from the owners, so you remain responsible personally if the business can’t repay the loan. There may also be an origination fee, and SBA loans may require a hefty down payment. And your credit score may get worse before it gets better. The convenience of a single payment is not worth it if you wind up paying more interest.
Applying for Business Debt Consolidation
Terms for approval may vary, but you usually need at least a year in business, a personal credit score of 670 or more and annual revenue of $50,000 or more. The lender is going to check that your current revenues and cash flow can accommodate the new payment, which is also a debt. Some lenders won’t allow funds to be used to pay off other debts, so confirm that first. You’ll need to provide bank statements, tax returns and financial statements.
When applying for business debt consolidation, you first add up the payoff amount of each of your existing debts. This becomes the amount you borrow. Then you figure out your new monthly payment. If it’s more than what you’re currently paying, you may not want to go ahead. Next, check both your business and personal credit scores. Where can you look? Banks and credit unions generally have the lowest rates, especially for their existing customers. Or you can go through marketplaces like Lendio, Lendzi, and Biz2Credit which have relationships with multiple lenders. You can prequalify on a lender’s website to compare offers before actually applying. Finally, you should carefully review the final documents to make sure there are no hidden fees.
If your loan application is denied, first check it carefully for errors in revenue, length of time in business, debt amounts or credit history. Then ask the lender for the exact reason for the denial, and address that weak spot before applying again. You might pay down debt, increase revenue, add a co-signer or just wait a bit for more operating history.
Alternatives include personal loans, which aren’t based on business revenue and may be a better option for newer businesses. A home equity loan or a HELOC could be an option if you have at least 20 percent equity, and they can be cheaper, but you could lose your home. Another way is a Rollover for Business Startups (ROBS), where you use your retirement money without a penalty, but your business must be a C Corp, and it’s recommended that you have at least $50,000 in your account. You could face some big fines if you mess that up, so hire a professional.
Consolidation makes sense only if the resulting loan comes with a lower rate or longer term that reduces the overall cost or improves your cash flow. If the consolidation comes with a higher APR or a much longer term, it could make your total cost go up. If you’re an established business with strong credit, the best rates tend to come from banks or SBA lenders. If you’re newer or have lower credit, online or alternative lenders may be your best bet. Just read the fine print carefully before you sign.
