Debt isn’t always a bad thing.
In fact, it can be quite good. Especially if you’re a small business (SMB) owner leveraging debt to gain funding, promote cash flow, and build credit.
However, do you know what is risky (and stressful)? Juggling multiple debt obligations at once.
It’s not only time-consuming, but it’s expensive and practically impossible to organize.
That’s why business debt consolidation is a lifeline for financially-burdened entrepreneurs.
Read on to learn all about business debt consolidation in this comprehensive overview.
Business Debt Consolidation Defined
What is business debt consolidation?
In short, it’s a loan that rolls multiple debts into a single monthly payment.
If that sounds slightly counterintuitive, you’re not wrong. After all, business debt consolidation involves taking out a new loan to pay off the old ones.
Like the eponymous ring in The Lord of the Rings, a debt consolidation loan “rules them all.” If that’s still confusing, a brief example should help.
Meet Alejandro, who has three small business loans.
While he’s doing a good job of making payments, he’s tired of dealing with multiple lending offices each month.
Plus, two of his loans have punitively high-interest rates that he’d like to reduce.
By pursuing business debt consolidation, he can get the help he needs. After a bit of research, he finds an online lender that offers favorable terms and successfully consolidates his debts.
Now, instead of handling a series of diverse payments, Alejandro is responsible for only one.
And he’s saving a lot of money along the way.
Pros and Cons of Business Debt Consolidation
Though a powerful tool, business debt consolidation may not be right for every entrepreneur.
It simply depends on your company’s unique situation, history, and goals.
The benefits of debt consolidation are undeniable, but there are also a few potential drawbacks to consider. To help you make the most informed decision, we aim to present the following pros and cons of business debt consolidation with maximum objectivity.
Pro: Lower Monthly Payments
Imagine dropping your interest rate from 15% to 10%. On paper, that may not look like a major adjustment, but in practice, it’s a game-changer.
By setting a lower interest rate, debt consolidation could do more than reduce expenses—it could free up cash flow to fuel your business.
Con: Up-Front Lender Fees
Nothing comes free—not even business debt consolidation loans.
Unfortunately, most lenders charge origination fees between 3% to 5% of the total loan amount.
While you may be able to find online lenders with negligible levies, expect to factor origination fees into your total savings calculations.
Pro: Accelerated Debt Repayment
By unlocking more favorable terms, business debt consolidation could also help you repay your debts more quickly.
For example, Alejandro had been paying $1,000 a month across multiple loan products. After consolidation, however, he pays just $750.
While enjoying the savings, he makes an impressive decision: he applies the $250 difference towards his consolidated loan, thereby expediting his repayment schedule—and accelerating his way towards financial freedom.
Con: Longer Repayment Timeline
Though consolidation can accelerate your repayment, it could also have the opposite effect.
After all, lower monthly payments are made possible by extending repayment schedules.
In other words, business debt consolidation enables you to pay less per month but over a longer period of time.
Let’s be clear: that’s not necessarily a bad thing.
You might stand to benefit from a protracted (but cheaper) repayment schedule. Still, other entrepreneurs may prefer to get out of debt ASAP and find that consolidation doesn’t aid that goal.
Pro: Streamlined Paperwork
Peace of mind doesn’t have a price tag, but it’s often as valuable as cash itself—especially for hard-working entrepreneurs.
By consolidating your debts, you’ll save yourself from routinely stressing over the who, what, where, and when of diversified debts. With just one debt responsibility, you’ll always know where to send the check.
And you won’t just save time—you can reinvest those precious hours back into your SMB.
Con: Larger Interest Costs
A longer repayment timeline can introduce a more insidious side-effect: greater interest accrual.
Indeed, business debt consolidation could ultimately cost far more over the life of the loan than your existing debts combined.
Pro: Enhanced Business Credit
Managing multiple debts can easily endanger your business credit. After all, late monthly payments are the mortal enemy of a healthy business credit score.
That’s why business debt consolidation can be so effective: it narrows your focus to a single consolidated loan, helping your business make more consistent payments.
Over time, those payments will boost your credit and increase your financial reach.
Resource: Weigh Your Options
The numbers don’t lie. Rather than guess at the hypothetical pros and cons, check out this free business debt consolidation calculator.
Simply input your existing debts (alongside their interest rates), and you’ll be able to compare the status quo with the potential benefits of consolidation.
How to Consolidate Business Debt
If you decide to pursue consolidation, you’ll find that the process is surprisingly easy.
Though each lender has their own requirements for debt consolidation, you can expect to go through the following steps.
1. Calculate Your Existing Debts
Start by assessing the total amount of debt you currently owe, including your loan balances, interest rates, and repayment terms.
During this fact-finding mission, it’s important to clearly list all of your business debts so you can identify which loans to consolidate.
2. Review Your Qualifications
When you apply for consolidation, lenders review the entirety of your financial health.
This may include your personal and business credit score, your annual revenue, your time in business, your business plan, and in some cases, your business financial statements.
Higher credit scores generally produce more affordable loan rates.
However, thanks to the rise of online lenders, you don’t necessarily need good credit to qualify for consolidation (though a solid credit score is essential to obtaining a lower interest rate).
3. Explore Your Loan Options
As an entrepreneur, you have many vendors to consider.
Of course, there are the obvious options, like getting a loan from a traditional bank or credit union. You might also consider low-interest loans from the Small Business Administration (SBA).
Beyond those immediate choices, a quick Google search will reveal the full spectrum of alternative online lenders at your disposal—both across the nation and within your local community.
Ultimately, we recommend casting a wide net during your exploration, ranking lenders according to their favorable interest rates, origination fees, repayment terms, and funding speed.
4. Organize Financial Documentation
Once you’ve chosen a lender, it’s time to prepare for your application.
Prior to contacting the lender, be sure to have the following documents and information on hand:
- Your personal financial information.
- Your personal and business tax returns.
- Your proof of business ownership (plus payroll records and licensing documents).
- Over two years of tax returns, along with your business financial statements.
- Your business plan, where you specify how you intend to repay the loan.
While these are the most commonly requested documents, your lender may contact you for more specific information.
5. Complete Your Applications
It’s finally time to apply.
Whether you choose a traditional bank or an alternative lender, most applications can be completed online.
After you submit an application, the lender may request more paperwork requirements to determine your eligibility.
Be prepared for varying responsiveness. Some vendors make same-day decisions, while others require a firm but tactful follow-up to get a response.
6. Evaluate Your Offers
Unless you are truly committed to one lender, we recommend submitting multiple applications.
Why? Because it’s helpful to have several options to compare and contrast.
For example, two different lenders might offer the same interest rate, but one might have origination fees of 2%, while the other charges 5%.
More importantly, you’ll be able to negotiate interest rates in good faith if you can present a competitive quote from another lender.
7. Close the Deal
Once you’re officially approved for the loan, it’s time to seal the deal.
While the signing process may take place in person, it’s more likely to happen online.
As always, be sure to carefully inspect the documents and review the terms.
If the fine print seems confusing, ask your lender for clarification. And if the contract seems questionable in any way, don’t hesitate to recruit a lawyer or financial professional before you sign on the dotted line.
8. Pay Off Existing Debts
Shortly after you sign the paperwork, the funds will be deposited into your account.
Once they arrive, it’s imperative that you use them to pay off your existing debts in full. In some cases, the lender may manage this process on your behalf—though this is becoming increasingly less common.
After the existing debts have been paid, you will then begin making payments on your business consolidation loan.
Business Debt Consolidation FAQs
Have additional questions about business debt consolidation?
If so, you came to the right place. Here are five quick answers to your most immediate consolidation concerns.
1) Does Debt Consolidation Always Lower Interest Rates?
The honest answer is no.
While consolidation frequently lowers the interest rate, there’s no guarantee that it will.
For some applicants, debt consolidation may lower the rate for several of their debts, while raising it for others. Though these individuals may not save large sums of money, they’ll still enjoy a streamlined repayment process.
Note: credit scores below 600 are less likely to receive a favorable interest rate. Therefore, building business credit before consolidation can be a strategic (and profitable) pursuit.
2) How will debt consolidation affect my credit?
At the outset, debt consolidation may cause a slight decline in your business credit score.
That’s because your chosen lenders will make a hard inquiry on your credit, which has a habit of lowering your score by just a few points.
Thankfully, these effects are merely temporary.
Over the long haul, however, debt consolidation primes your credit for significant improvement.
After all, lower interest rates and more affordable monthly payments help make payments on time. And when you make payments on time, your business credit accelerates.
3) When Does It Make Sense to Consolidate Business Debt?
Business debt consolidation can benefit a wide variety of entrepreneurs. After all, any applicant will enjoy the convenience of streamlined monthly payments.
Nevertheless, there are certain business owners especially suited to this financial transition.
For example, if you have solid credit and a considerable amount of debt, consolidating could save you a fortune in interest payments over the long run.
Generally speaking, if consolidation unlocks either a better interest rate or a longer repayment term, it’s well worth your time and consideration.
4) Can You Consolidate Business Debt More Than Once?
Technically speaking, you can consolidate business debt multiple times across your career.
However, it may be difficult to qualify for secondary and tertiary debt consolidation if the first venture fails.
Business debt consolidation should not be viewed as an opportunity to continue or ramp up old spending patterns.
Instead, it’s most effectively regarded as an opportunity to reset your business budget, to anchor your monthly cash outflow, and to allocate resources to the areas that need it most.
5) Can Business Debt Consolidation Loans Be Used to Cover Personal Debts?
No.
In the vast majority of cases, business debt consolidation loans are exclusively intended to cover the financial obligations of your firm—whether in the form of working capital loans, business lines of credit, or business credit cards.
However, personal debt consolidation is a popular option worth considering.
If you’d like to learn more about personal debt consideration, check out our complete guide.
uLink: Your Partner in Small Business
Business debt consolidation presents compelling options for many entrepreneurs.
Whether you pursue consolidation today or are merely considering it for future use, we hope you have renewed confidence in the many pathways open to you and your company.
At uLinkbusiness, we understand how important it is to take care of your business debts. And while you do that, we’re here to connect you with the global marketplace.
More specifically, our mission is to help make your international B2B payments as seamless as possible, whether it’s for paying international invoices, inventory, or payroll.
Discover what we can do for your business.
