How to Consolidate Business Debt

What is business debt consolidation?

Business debt consolidation is when a business takes out a loan and uses it to pay off other loans, thereby consolidating several loans into one. Benefits include:

• Reducing the total monthly payment
• Lowering the average interest rate
• Reducing the number of monthly payments

If your business debt is getting out of hand, it may be simpler or cheaper to move several loans into one, thereby reducing the number of payments you need to make each month. This can make it easier to ensure no payment is missed.

To consolidate your debt, you'll want to first understand your current situation. Gather all your loan information, including the total owed, total monthly payments and the interest rates of each loan. You’ll also need to know your business’s credit score, annual revenue and whether you plan to offer collateral or a personal guarantee.

How to qualify for a business debt consolidation loan

Business loans are available from banks, credit unions and online lenders. When shopping for a loan, be wary of predatory lenders and make sure to compare each loan option's APR — not just its interest rate — to understand the full cost of borrowing. 

The process of getting a business loan for debt consolidation is similar to personal loan consolidation, but it’s more complex.

Nicole Dilts, vice president of commercial solutions at MSU Federal Credit Union in East Lansing, Michigan, said: “Business loans generally require a more comprehensive review, including both business and personal financial documents such as tax returns, personal financial statements and credit checks for the business owners. Personal loans tend to focus more on individual credit scores and income verification, such as W-2s and personal tax returns.”

To determine whether you meet application criteria and what loan amount and interest rate you can qualify for, lenders consider factors such as your credit score, amount of time in business, annual revenue, and debt-service coverage (a measure of how the business’s cash flow compares to its debt).

The documentation you'll need to apply includes your tax returns and financial statements, as well as governing documents, such as articles of incorporation. You may also need your business license or business plan. 

When to consider a business consolidation loan

You should consider a business consolidation loan if:

• The business is struggling to pay its debts
• You're having trouble keeping track of the payments
• A consolidation loan can lower your interest rates

Maintaining strong cash flow is an important part of running a business. If your debt payments are too high, you may struggle to run your business day to day, which can lead to even bigger problems and could eventually cause you to go out of business.

Consolidating business debt and lowering your monthly payments can free up space in the budget to run the business more efficiently, which in turn can mean maintaining sufficient inventory, retaining the best employees and sustaining positive vendor relationships.

Sometimes it’s also a way to get better rates and terms on existing debt, even if you aren't struggling at the moment. For example, Dilts said, “If you now have collateral available that wasn’t pledged when your current loans were originated, you may qualify for improved rates and terms.

“Similarly, if your business has been operating for more than two years and you can demonstrate strong historical financial performance compared to when you first obtained a startup loan, you may also benefit from refinancing.”

You may want to avoid consolidation if doing so will tempt you to take on more debt.

You may want to look into other options if consolidating your debt won’t improve your cash flow or if lower-cost options are available to you. For example, if your balances aren’t extremely high, you may want to consider a business credit card with a zero percent introductory period.

Consolidating debt can free up available lines of credit or credit cards, making it tempting to spend more if you don't keep the bigger picture in mind. If you’re relying on debt to carry your business, examine the deeper issues before making any decisions. Consider talking to a business coach who is an expert in your industry so you can make strategic and fundamental changes to your business.

Pros and cons of business loan consolidation

Even though a business consolidation loan can provide some relief, there are benefits and drawbacks to consider before taking one out:

Business debt consolidation tools

There are several ways you can consolidate your business debt, including:

• Small Business Administration (SBA) loans: The Small Business Administration (SBA) rarely makes loans directly but backs loans made by lending partners instead. This helps businesses qualify for loans or terms that they wouldn't have been able to otherwise. Specifically, the 7(a) loan can be used to consolidate debt.
• Business credit cards: Business credit cards can be a good option since you may be able to get a zero percent annual percentage rate during an introductory period. However, you'll want to ensure you can pay off the balance before the introductory period ends since credit cards typically have high interest rates.
• Secured loans: A secured business loan or a security agreement — also known as a chattel mortgage — uses your equipment or inventory as collateral. This lowers lending risk, which can help you get better terms. 
• Personal loans: If your business can't get a loan, you can get a personal loan and use it for your business. Make sure that the lender approves this use before you take out the loan. Also, be aware that you are personally guaranteeing this loan, and it will affect your personal credit if it’s not paid on time.
• Private lenders: If you aren't able to obtain financing elsewhere, you can look into private lenders. These are often online banks, rather than traditional banks. A big drawback is that they often charge higher interest rates and have shorter terms, so it may not be a good fit for debt consolidation, depending on your situation.

» COMPARE: Best consolidation loan companies

Other methods to manage business debt

If debt consolidation isn't suitable for your business, there are other options for dealing with unmanageable debts.

• Refinancing: Refinancing your current loan can reduce the monthly payment by extending the term, which can help free up some much-needed cash flow. Take note of the new interest rate before signing up, though; it may be higher than the original rate.
• Creditor negotiation: If you are having trouble making your payments, call your creditors. They may be willing to negotiate the terms of the loan.

When asked about negotiating with vendors and suppliers, Dilts explained, “You might be surprised by the flexibility they’re willing to offer, especially if you have a positive, long-standing relationship. By simply asking, you may be able to secure extended payment timelines or discounts that ease short-term financial pressure.”

• Equity financing: If you need an infusion of cash, you can sell a percentage of the ownership of the business. The benefit is that you don't have to pay back the loan, but the drawback is that you lose part of your stake in the business.
• Chapter 11 bankruptcy: If you've exhausted all other options, Chapter 11 bankruptcy might allow you to stay in business while getting your debt under control. This filing helps businesses to restructure their debt without losing their assets.

FAQ