Struggling with debt?

Consolidating Small Business Debt: A Helpful Guide

Running a small business can be extremely rewarding, but it also comes with its fair share of challenges. One common issue many small business owners face is juggling multiple business debts like loans, credit cards, and lines of credit. While these financing options provide necessary capital, having too many debts with different payment schedules and interest rates can quickly become difficult to manage. This is where consolidating your small business debts can help.

What is Small Business Debt Consolidation?

Debt consolidation simply means taking out one new loan to pay off multiple existing debts. This allows you to roll all your debts into a single loan with one monthly payment. The goal is to simplify repayment and potentially secure better terms like a lower interest rate or longer repayment period.Consolidating can make managing cash flow easier since you’ll have just one payment to budget for instead of many. It can also help you pay off debt faster and save money on interest compared to keeping separate debts open.

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How Does Small Business Debt Consolidation Work?

The process of consolidating business debt is straightforward:

• You take out a new consolidation loan from a lender like a bank, credit union, online lender, or SBA. The loan amount covers your total payoff balances.
• You use the proceeds from the new loan to pay off your existing business debts like credit cards, loans, and lines of credit.
• Going forward, you make one monthly payment to the consolidation loan lender instead of multiple payments to different creditors.

It’s very similar to consolidating consumer debt, just with business financing instead of personal debts. The key is exchanging multiple debts for a single new loan so you have one predictable monthly bill.

Pros of Small Business Debt Consolidation

There are several potential advantages to consolidating business debt:

• Lower interest rate – If you can qualify for a consolidation loan with a lower rate than your current debts, you’ll save significantly on interest over time. This allows you to pay down principal faster.
• Longer repayment term – A longer term means lower monthly payments, freeing up cash flow. Just be sure the savings outweigh extra interest paid over the life of the loan.
• Single payment – One monthly bill is much easier to manage than multiple loan payments. This simplifies budgeting.
• Pay off debt faster – Consolidating high-rate debts into a lower fixed-rate installment loan allows you to get out of debt quicker.
• Improve credit – Paying off credit cards and lines of credit can improve your business credit scores as you decrease revolving credit utilization.
• Increase cash flow – More affordable monthly payments means more money available to grow your business.

Cons of Small Business Debt Consolidation

While there are many potential benefits, consolidating business debt also comes with some drawbacks to consider:

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• Fees and closing costs – You may have to pay application, origination, or prepayment penalties when taking out a new consolidation loan. Factor these fees into the total cost.
• Higher total interest – Even if the rate is lower, a longer repayment term means you pay more total interest over the life of the loan. Do the math to see if it’s worth it.
• Collateral required – Loans large enough for consolidation often require assets like equipment or real estate to secure the debt. Not all businesses have tangible assets to leverage.
• Missed payment risks – If the consolidated payment proves too high for your budget, you risk damaging your credit and potentially losing collateral.
• No change in spending habits – Consolidating alone won’t solve ongoing cash flow problems if you continue overspending. It must be paired with budget cuts.
• Prepayment penalties – Your existing debts may charge early termination fees if you pay them off before maturity with a consolidation loan.

What Debts Can You Consolidate for a Small Business?

Most types of business financing can be consolidated, including:

• Term loans
• Lines of credit
• Credit cards
• Equipment financing
• Accounts receivable financing
• Payroll financing
• Merchant cash advances

As long as the debt is in your business‘s name, it should be eligible for consolidation. The only exception would be any debts already secured by collateral that the lender is unwilling to relinquish.

Where Can You Get a Small Business Debt Consolidation Loan?

There are several options for obtaining a consolidation loan:

• Banks – Local banks and national banks like Chase offer installment loans and lines of credit for consolidation. They provide some of the lowest interest rates but also examine personal credit.
• Credit unions – Not-for-profit credit unions offer small business loans and lines of credit at competitive rates. You need to become a member to qualify.
• SBA loans – The Small Business Administration guarantees loans up to $5 million that can be used for consolidation. Rates are low but the process is lengthy.
• Online lenders – Companies like Credibility Capital and Fundation provide fast small business loan approvals online for debt consolidation. Rates are higher but terms are flexible.
• Alternative lenders – Non-bank lenders like OnDeck and Kabbage offer consolidation loans up to $500,000 with quick approvals but very high rates.
• 401(k) Business Financing – Some companies let you borrow against your existing 401(k) balance and use it to repay debts. This avoids taking on new debt but puts your retirement at risk.

What is the Process for Consolidating Small Business Debt?

Follow this general process when consolidating business debt:

1. Determine goals – Figure out what you want to accomplish by consolidating like reducing payments, getting a lower rate, or simplifying bills.
2. Review existing debts – Make a list of all business debts with balances, interest rates, and terms. Calculate your total payoff amount.
3. Check for prepayment penalties – Avoid surprises by verifying if any existing lenders charge early termination fees for paying off debt ahead of schedule.
4. Compare consolidation loan options – Research different lenders and offers to find the best rates, terms, fees, and loan amounts for your situation.
5. Apply for consolidation loan – Once you select a lender, complete the application providing all requested financial documentation and business information.
6. Close on loan – After approval, accept the offer, review loan documents carefully, sign the agreement, and complete any other lender requirements.
7. Pay off old debts – Your lender will either pay off your old accounts directly or disburse the funds for you to do so. Pay off balances promptly after receiving the consolidation loan proceeds.
8. Begin new single payment – You’re now ready to begin making one monthly payment to your consolidation lender. Enjoy the simplicity and potential savings!

Tips for Getting the Best Small Business Debt Consolidation Loan

Follow these tips when seeking a consolidation loan:

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• Get pre-qualified – This shows you what rates and terms you can realistically expect so there are no surprises later.
• Talk to your existing lenders – Ask if they are willing to modify terms or refinance your current debt before going to another lender.
• Improve your credit – Payment history makes up over one third of small business credit scores. Clean up reporting errors and pay bills on time before applying.
• Have your documentation ready – Lenders will want tax returns, bank statements, profit and loss statements, and other financial records showing your ability to repay the debt.
• Bring collateral – Loans large enough for consolidation often require pledged business assets. Having collateral can help you secure better loan terms.
• Compare multiple offers – Never take the first deal you are offered. Shop around with several lenders to find the most competitive terms.
• Read the fine print – Scrutinize the loan agreement before accepting to ensure you understand all fees, penalties, and obligations. Don’t let urgency cloud your judgment.
• Automate payments – Set up autopay from your business checking account so you never miss consolidated loan payments and hurt your credit score.

Alternatives to Small Business Debt Consolidation

Other options beyond consolidation loans include:

• Refinancing existing debt – Rather than consolidate all debts, you may be able to improve terms by refinancing just your largest, most problematic loans.
• Restructuring payments – Ask existing lenders to modify payment schedules if you can’t consolidate. Extending terms can sometimes lower monthly payments.
• Using personal loans – If your credit is better than the business, a personal installment loan used for business debts can provide lower rates.
• Employing balance transfer credit cards – Transferring business credit card balances to a new 0% introductory APR card saves substantially on interest for a short time.
• Liquidating assets – Selling unneeded equipment, vehicles, or property can provide a cash infusion to pay off debts quickly.
• Factoring receivables – Rather than take on new debt, factoring turns outstanding invoices into immediate cash for paying bills.
• Using retirement funds – As a last resort, 401(k) business financing loans use your existing retirement savings to repay debts.

Key Takeaways on Small Business Debt Consolidation

• Consolidating business debt means rolling multiple loans into one new loan with a single monthly payment.
• Benefits include lower payments, reduced interest rates, simpler budgeting, faster payoff, and improved cash flow.
• Drawbacks can be prepayment penalties, higher total interest costs, and increased risk from larger loan amounts.
• Many types of business financing, including loans, credit cards, and lines of credit, can be consolidated.
• Banks, credit unions, online lenders, and the SBA all offer consolidation loans with different rates and qualification criteria.