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:

• The business determines which loans or debts it wants to consolidate
• The business applies for a new debt consolidation loan
• Once approved, the business uses the funds to pay off the debt it wishes to consolidate
• The business makes a single payment on only the new loan moving forward

Overall, business debt consolidation provides an opportunity for businesses to do the following:

• Lengthen repayment terms
• Lower monthly payments
• Reduce interest rate
• Better oversee cash flow and liabilities
• Improve credit score
• Give flexibility to borrow more capital
• Simplify monthly bills to avoid missing any payments
• Reduce payment stress

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.

Bank loans

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.

Non-Bank Financing

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:

• Cash Advance(s)
• Credit cards
• Lines of credit
• Term Loans 
• Other funding instruments

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:

Pros

• Payments are more manageable

• If a business has numerous payments, due dates and interest rates to handle, then debt consolidation is efficient and will help the business save time.

• Cash flow can be improved

• Assuming the business obtains a lower interest rate, it will be able to hold on to more cash every month. These extra funds can go toward scaling the business or just maintaining the status quo and giving the business more breathing room. 

• Credit score could go up

• With only one loan payment, the business should manage payments better and improve its payment history. This can improve the business’s credit score, which will make the business more attractive to lenders. The chances are higher a lender will give more loans and credit offers going forward. 

Cons

• There may be upfront costs

• Some of the loans the business will pay off may contain prepayment penalties. Also, the new lender may charge an origination fee for the consolidation loan.

• A lower interest rate isn’t guaranteed

• If a business obtains a consolidation loan that has a higher interest rate or the same interest rate as the existing debt, then it will likely pay more in the long run.

• More interest will be paid over a longer repayment period

• When a business takes out a new loan to pay off old debt, the loan terms begin again. As such, the business will spend a longer period of time paying off its liabilities, so more total interest will be paid in the long term. 

• Cash flow issues are not guaranteed to be resolved

• If a business is losing money, then consolidating the debt won’t fix the problem. It would just be putting a band-aid on a long-term problem that needs another solution. 

• Credit score could go down

• When a business obtains a new loan, it can affect the debt-to-income ratio and credit score in a negative way. At the least, there will be a new lender inquiry that should bring the score down for the short term.

‍

Before a business consolidates its loans, it should consider the following factors:

• Business history

• If the business has been in business for more than three years and has established credit, then it should have a good chance at obtaining favorable loan terms from a bank or the SBA. In particular, it should expect good loan terms if the business has grown a significant amount since its inception.

• Credit score

• If the personal credit score for the business owner and the business credit have improved since the business took out its original loans, then it should get a lower interest rate than before.

• Existing debt 

• If a business doesn’t have debt that is close to maturing, then it makes sense to proceed with a business consolidation loan. However, if there is debt that is close to being paid off, then it likely won’t be cost-effective or time-efficient to consolidate the debt.

• Terms for the new debt

• A business needs to ensure it qualifies for better terms then it currently has for it to make sense to consolidate its debt. If a business obtains a new loan with worse terms, then it sets itself up to fail. It should ensure the new loan’s repayment term and interest rate are going to be more favorable.

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:

• Business TAX ID (federal tax id number, aka EIN/FEIN)
• Estimated business revenue and average bank balances
• Debt schedule
• Social security number for all applicants
• Last 3 months of business bank statements (download the PDF statements from your business bank account)
• Most recent year of business tax returns

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.