A business debt consolidation loan can help you reduce overall debt payments (loans, advances, etc), combine multiple payments into one and also reduce overall time to repay debts. These types of loans are a great solution for freeing up cash flow, stabilizing the business and simplifying finances. Businesses should consider a debt consolidation loan if they have multiple loans or advances outstanding and could benefit from a single loan with one repayment schedule with less-frequent payments.
If your business could benefit from a debt consolidation loan, evaluate your options carefully. In this article, we explore Consolidation Loans, Pros and Cons & How to Apply.
Business debt consolidation is the process of taking out a new loan to pay off existing business debt. By taking out a business debt consolidation loan, an organization can combine multiple liabilities into a single monthly payment, reducing payment stress and potentially saving money in the long run.
Businesses often take on multiple types of debt like installment loans, lines of credit and credit-card payments that usually have high interest rates. Business debt consolidation loans allow a business to restructure its debt and replace its high monthly payments with just one payment.
Consolidating business debt is similar to consolidating other types of debt. The process works as follows:
Overall, business debt consolidation provides an opportunity for businesses to do the following:
In order to make sense, the new loan should have a lower interest rate and/or an extended repayment schedule than your existing debt, offering you more time to pay off your current loans with lower payments. Just note that you’ll pay more interest over time as you increase the length of the repayment term on your new loan. This may not be a bad proposition if current state monthly cash flow is highly important.
You may owe a fee to the new lender like an origination fee for loan processing. Be sure to run numbers and make certain a debt consolidation loan will indeed save you money and will not cost more than your existing financing.
There are three main types of business financing options that can be used to consolidate debt: Bank loans, Small Business Administration (SBA) loans and non-bank financing programs.
Banks and credit unions tend to provide access to a debt consolidation loan although the requirements are often very stringent and the time to receive these types of loans can be lengthy.
If your business has the luxury of up to 60-days to apply, get approved and complete the consolidation process then banks are a great option since they offer the lowest interest rates and longest terms.
Be advised that a business needs to have positive business credit history and compensatory revenue to qualify. Depending on the bank, a business may need to have a minimum of 5 years of history and the ability to showcase its business income to be eligible. And it’s not uncommon for a bank or credit union to place a UCC-1 on the business and add a covenant to the loan agreement preventing the business from obtaining other types of financing until the loan is fully repaid.
The typical terms for a debt consolidation loan with a bank are as follows:
Companies that aren’t eligible for a traditional bank loan may consider an SBA 7(a) loan as the next best choice for consolidating their business debt.
The federal government administers SBA loans for small businesses that are in need. The goal of the loan is to assist companies that do not have a large amount of cash reserves.
Although banks may require years of verified credit, SBA loans were created for businesses that are just beginning or have not been as financially stable. In particular, the SBA 7(a) loan may be used for a business to consolidate its debt.
Please be aware the SBA has the following restrictions on utilizing 7(a) loans for consolidating debt:
The typical terms a business can expect for an SBA 7(a) are as follows:
Businesses desire SBA 7(a) loans because they are similar to bank loans in that they also have low interest rates and long repayment terms. The tradeoff is that although SBA loans are easier to access than bank loans, they have a longer application process. Please expect the funding bank to place a UCC-1 on the business and add a covenant to the loan agreement preventing the business from obtaining other types of financing until the loan is fully repaid, this is a general requirement of SBA loans.
Some businesses don’t have the luxury of 30 - 60 days time to wait for funding or will not qualify for traditional bank financing or an SBA loan, however they can obtain funding through non-bank methods such as a peer-to-peer lending business or online lender. These types of capital providers are typically fast and flexible; however, the cost of financing is often greater than a bank loan. In addition, the payment frequency may be quicker and the term length will likely be less.
A debt consolidation loan can pay off the following types of debt:
Companies tend to take on loans to fund their initial operations when they start up or end up taking short term or high cost loans to get them through a limited period of time. Rather than utilizing one line of credit, they will use several loans or advances to cover costs and make the minimum payment so they can maintain high margins. Overall, the consolidation loan can pay off all these loans.
Just keep in mind that a business should only consolidate its business debts. Combining personal and business debt under one new consolidation loan would likely be a nightmare for keeping records accurate, managing cash flow and reporting.
There are pros and cons to obtaining a business consolidation loan:
Before a business consolidates its loans, it should consider the following factors:
The amount of time it will take to get a business consolidation loan can depend on which business financing option the borrower uses.
It typically takes up to 90 days to obtain approval for a traditional business consolidation loan and 60-90 days to get approved for an SBA loan.
However, non-bank financing lenders provide a much quicker timeline. Companies can apply for a business consolidation loan from non-bank lenders and receive their funds within a day if they provide all the required documentation.
Once a business has determined that it wants to apply for a business consolidation loan, then it should gather and organize its documentation.
Although each lender will have its own requirements, the majority will focus on credit score, income, and debt-to-income ratio. Here are the steps a business should take to ensure it is ready to apply:
Step 1: Click on the Get Approved button above and answer a few basic questions about your business needs. We will inform you about your best options and how many exist (this will set your expectations).
Step 2: After this is complete, you will be asked to create a username and password to begin your electronic loan application. This process normally takes about 6 – 7 minutes (if you have all your documents easily accessible and ready).
To complete the loan application, here is what you will need to have handy:
Step 3: Once the application process is complete, we will send you the completed application for you to review and sign. Once you have signed for your application and uploaded the necessary documents, the process is complete. You have officially applied and started your journey to receiving pre-negotiated debt consolidation funding offers. Your Lendzero funding specialist will reach out to you to guide you through the remaining steps of the process, and provide the necessary guidance and support needed with the goal of successfully obtaining the proper loan.