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:
- Interest rate: Below 10%
- Payment cycle: Monthly
- Repayment term: Approximately 10 years
SBA (Small Business Administration) loans
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 goal of the existing debt must qualify under the SBA 7(a) guidelines
- The new loan must have a payment amount that is at least 10% less than the current loans
- The business must write an explanation regarding why the existing debt does not have a reasonable structure
The typical terms a business can expect for an SBA 7(a) are as follows:
- Interest rate: 5.5-9.25%
- Payment cycle: Monthly
- Repayment term: 10-25 years
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.