If you are juggling several due dates, variable rates and a stack of conflicting terms, your business debt has probably stopped feeling like a growth tool. By consolidating multiple debts into one loan, businesses can streamline their repayment process and potentially lower their overall interest rates. Here is how a consolidation loan works, and when it makes sense.
A business debt consolidation loan is a financing tool that merges multiple existing business debts into a single new debt. The business debt consolidation loan allows the business owner to pay one monthly bill and avoid the hassle of keeping track of multiple payments and deadlines. Your credit cards, lines of credit, merchant cash advances and other loans, held by different lenders, become one loan from one lender. In practice, the consolidation process works like this:
- 1. A borrower applies for a loan to pay off existing debt.
- 2. The lender agrees to finance the total amount of your debt.
- 3. The lender pays off the existing debt.
- 4. The borrower begins making monthly payments on the new loan.
Now you are paying only one creditor each month, and your payments are easier to keep track of.
People often confuse this with refinancing. If you refinance, you use a new loan to replace the old one. Usually the goal is better terms, such as a lower rate on a single loan. Consolidation is one type of refinancing: consolidating means you take out one new loan and pay off all of the others.
Carrying debt from several sources is normal for a growing business. Consolidation makes more sense the more complicated your debt situation becomes, and the more likely it is that you will get into trouble with your different payments. If market rates have dropped or your business credit profile has improved since you signed your loans, you might be able to save money by taking out a new loan at a lower interest rate. Then there is cash flow. If you owe a lot of different creditors, and have several payments due each month, it can be hard to make them all. Consolidating can mean that instead of making lots of payments, you make just one. That can make it much easier to stay on top of the payments.
Your lender relationships matter too. If they have soured, or a lender is charging you punitive rates, that can be reason to get out. You’ll still be carrying a debt, but at least you’ll have a friendly face at the other end. Falling behind is costly. Every missed payment could trigger a late fee, and you might have a separate late fee for each debt. It also damages your credit score. Combining your loans can reduce or eliminate the chances that you’ll miss a payment on any one of your loans - especially if your original loans have monthly payments on different days. And if you hope to raise equity later, a simpler balance sheet and steadier cash flow help, because investors are more likely to give your business an influx of funding if you have a clear road map to get your finances in order.
Can You Consolidate
What can you consolidate? Basically anything your business owes.
- Term loans.
- Business credit cards.
- Business lines of credit.
- Merchant cash advances.
- Equipment loans & leases.
- Invoice financing.
- Micro loans.
- Payday loans.
- Loans from small alternative lenders.
Business cash advances count as well, and even mortgages and car loans can go in. What you should not do is fold personal loans into the same package. You need to treat your business debt separate from your personal finances. When you mix the two, it muddles the business finances, makes your reports harder to write, blurs the legal and financial line between you and your company, complicates your taxes and raises red flags for lenders and investors.
Compare Offers
If there is ever a time to create a list, it’s when you’re looking to get a business debt consolidation. Before you sit down with any lenders, you should know everything you owe and what you’re dealing with. Write down each of your individual debts - including the creditor name, amount, type of debt (such as credit card) and the interest rate. Add fees and payment schedules too. Next, pull a copy of your business credit report. Make sure it is accurate and up to date. Your personal credit is also an important piece of the puzzle. Although there’s no standard qualification process for a consolidation loan, there are some common things that all lenders want to see when you apply. Lenders will check both, and they will look for stable revenue so they know you can keep up with the new payment.
Then compare offers. Take a look at both the interest rate and how it is charged before signing anything. Weigh repayment terms, funding timelines and fees as well. Make sure you look over the loan agreement. The fine print could have some unpleasant surprises. Then do the math. If you simply combine your loans into a new loan, and your business does not qualify for a lower interest rate, it probably doesn’t make sense to consolidate. When you apply, expect to hand over your business plan, business licenses and a list of your debts, along with documents such as your financial statements and tax returns. You may be able to negotiate different terms if you have stronger negotiating power. Ask about a lower rate, smaller fees or a longer term.
Once your application is approved and you accept the loan terms, your lender pays off your existing debt. From then on, you repay the lender according to the new loan’s terms. Make every payment on time until the debt is gone; setting up automatic payments on the new loan helps make sure you never miss a payment. After that, look ahead. Tighten how you manage cash flow, plan your next growth move, and set aside some extra cash to use as an emergency fund. After all, you never know when you’ll need more money for a delay or emergency.
The Benefits
The benefits are real: one payment, steadier cash flow, possibly a lower rate, and a way to replace high-cost debt. It also simplifies accounting and record-keeping because there’s only one debt to manage. But there are costs too. Consolidating your debt can lock you into a long-term commitment, meaning you may get stuck with an onerous payment plan for years. And the process of refinancing or consolidating often involves fees. Approval can be difficult, especially if you have a poor business or personal credit history. You may need to use business property as collateral, and some lenders ask for personal guarantees, meaning that if you are unable to pay, your personal assets may be at risk. If you’re going to be under that one loan for a long time, it needs to be a loan you can actually afford.
Traditional banks make consolidation loans. You can also apply with online lenders, or go through the Small Business Administration. Many lenders want a minimum time in business, minimum revenue and strong credit scores, so check your eligibility first. Comparing lenders is the best way to find the right loan, because not every lender has the same offers.
Consider an early-stage founder of an e-commerce brand who was carrying several high-interest credit cards plus a merchant cash advance. The payments were eating her cash flow, and she wanted to eliminate the stress of managing multiple monthly payments. She turned to a business debt consolidation loan to make it easier to pay back her debt. Her monthly payments were different for each of her debts, but now she is only making one payment. Her overall interest costs fell and the daily withdrawals for the advance stopped. But more importantly, the cash flow is cleaner and she only has one payment to worry about. She is now ready to talk to investors about growing the company.
So how does a business debt consolidation loan work? In short, it works by consolidating multiple debts into one larger debt, with a single monthly payment. You pay off your existing debt with the proceeds from your new loan. However, it is important to note that a business consolidation loan is not a magic solution. It does not remove the debt altogether, but it allows you to pay back all existing debt using only one loan. Debt consolidation doesn’t solve your problem, but it can simplify your life. When several payments are straining your cash flow, that can be exactly what your business needs.
