Business Debt Consolidation: A Guide for Small Businesses

As a small business owner, you already focus on increasing revenue and managing expenses to strengthen cash flow, build a more stable financial foundation, and grow your business . When you’re managing multiple business loans, that’s a big challenge! But it could be much easier through business debt consolidation.

In this guide, you’ll learn the benefits of debt consolidation, the truth behind debt consolidation myths, and how to consolidate your business debt to ease stress today and strengthen your business’s financial foundation for the long term.

What is business debt consolidation?

In a nutshell, business debt consolidation means combining multiple debts into one larger loan.

Over the last couple of years, interest rates have trended higher. As a result, business debt that you took on during that period likely came with higher interest rates for each loan or credit card you’re using. As more of each payment goes toward interest, it takes longer to pay down the principal balances. For many small business owners, this can lead to a a cash flow crunch.

Now is a good time to explore small business loans that can help you consolidate business debt into a single, manageable monthly payment.

At the very least, this gives you just one payment each month rather than having to track multiple monthly payment dates. Consolidation can also offer a lower overall interest rate as rates continue to decrease. This allows you to pay down more principal each month and free up funds to improve cash flow.

Pros and cons of business debt consolidation

To determine whether debt consolidation is an option you should explore for your business, take a look at these pros and cons:

  • Simplified payments: When you consolidate your debts into a single monthly payment, it’s easier to budget and automate.
  • Potential interest savings: When you have multiple business debts, you also have a range of interest rates that can fluctuate during your repayment periods. With a consolidation loan, you may find an option with a lower overall rate and/or a fixed interest rate, so that your payments are more predictable.
  • Pay off your principal faster: When you find a loan with a lower interest rate, more of each payment can go toward the principal, helping you pay it down faster.
  • Improved cash flow: When you consolidate business debt with better terms, you have some flexibility. You can continue to pay the same amount each month as you’re already paying to pay down principal faster. Or you can pay the lower monthly payment, which can free up cash for better cash flow each month.

Business debt consolidation cons

  • Potentially longer repayment terms: When you consolidate debt, you can lower your monthly payments by lengthening the repayment term. This means that you’ll repay your debt for a longer length of time. While that can lower your monthly payment in the short term, it extends your payback period and could make it harder to get new financing down the line.
  • If you’re not careful, you could end up deeper in debt: If you consolidate your business debt, you’ll have more cash in your business. Use it wisely and be strategic. Don’t use that as an opportunity to spend whatever has been freed up on your credit cards or lines of credit or you could end up deeper in debt.

Debt consolidation myths vs. reality

Debt consolidation can be an excellent tool to help you better manage your business, but there are misconceptions about it. Here’s the truth behind common debt consolidation myths:

  1. Myth: Debt consolidation always lowers interest rates.

    Reality: While debt consolidation can potentially lower interest rates, it’s not guaranteed. Rates depend on your credit score, lender policies, loan options, and market conditions.

    Use a payment calculator to determine whether it could lower your overall monthly payments. You can compare multiple sources of debt and provide an estimate of potential monthly payment scenarios with a consolidation loan.
  2. Myth: Debt consolidation immediately improves your credit score.

    Reality: Initially, debt consolidation may actually lower your credit score because it will require at least one hard inquiry on your credit. This is when a lender requests your credit information to determine whether to approve you for a loan. However, in a relatively short time (over a few months, usually, and as long as you consistently make payments on time), your credit score will rebound and may even improve.
  3. Myth: Debt consolidation means debt elimination.

    Reality: Debt consolidation simplifies and restructures your business debt, but it doesn’t eliminate it. You’re still responsible for paying off the consolidated amount.
  4. Myth: All business debt consolidation loans are the same.

    Reality: There are different types of debt consolidation loans, each with their own terms. It’s important to know that it’s not necessary to work with a debt consolidation company – a paid third-party that will offer to find you debt consolidation loans.

    The best approach is to do the research yourself by finding options tailored to small businesses that can be used for consolidating higher-cost debt.
  5. Myth: Consolidation is the best option for all small businesses.

    Reality: Debt consolidation is beneficial for many businesses, but whether it’s best for you depends on a few factors. You should review your business’s financial position, the amount of debt your business is carrying compared to your revenue, and your plans for your business.

    For example, let’s say you’re using different loans, lines of credit, and credit cards to fill revenue gaps. Debt consolidation would reduce the number of monthly payments you’re making, but it’s not addressing the real issue here: your revenue gaps. You may want to review your business operations, preferably with the help of your accountant, to identify opportunities to increase revenue and profitability while consolidating your debt.
  6. Myth: You can consolidate all types of business debts.

    Reality: While most business debt can be consolidated, some lenders may not allow it. You may also have to pay prepayment penalties along with principal balances.

    Your best course of action is to look at each debt individually to determine which could be paid off with a debt consolidation loan. Even simplifying a portion of your business’s financials could make a big difference for your operations.
  7. Myth: Debt consolidation will reduce your monthly payments significantly.

    Reality: Yes, it’s true that a debt consolidation loan can reduce your monthly payments, but that’s because the new loan has a longer repayment term.

    For that reason, you may ultimately pay more in combined principal and interest. However, this can be a worthwhile tradeoff if it gives you financial breathing room to stabilize and grow your business.
  8. Myth: You don’t need good credit to consolidate debts.

    Reality: Credit scores play a significant role in qualifying for consolidation loans. They also impact your loan terms. As with any loan, the better your credit score, the better the terms and your chances of approval. If a lender is offering a consolidation loan without any credit check, that could be a red flag of a predatory lender.

How to consolidate your business debt

If you’ve determined that business debt consolidation is the best path forward, it’s important to find the best terms for the loan. Here are the steps you need to take before talking with a lender:

1. Assess your current debts

Make a list of all of your business debts, including any outstanding loans from commercial lenders, friends and family, or any other source. Then, list out the principal balance for each, the interest rate, the term (how often you make payments and when a loan will be paid off), the minimum payment due, and the due date.

Also, make a note of any loans that may have a prepayment penalty or may otherwise not be good candidates for debt consolidation (you may not have any that fall into these categories).

2. Check your credit score

Using a free tool like Credit Karma, check your current credit score and credit information. Make sure that there’s no fraudulent accounts or other errors that could lower your score or otherwise impact your ability to get the best loan terms.

3. Research debt consolidation options

There are several potential sources for debt consolidation loans, including banks and alternative lenders, like Pursuit. When researching options, look for lenders that specialize in loans for small businesses. You want to work with a lender that offers competitive interest rates, longer loan terms, low fees, and upfront information on prepayment penalties.

You’ll also need to know what collateral you or your business has available. Depending on your lender’s requirements, you may need to secure a consolidation loan with business equipment and/or property, or even personal property, such as your home. So make sure to ask your lender about their requirements at the start.

If any options seem too good to be true, use extra caution to ensure you don’t work with a predatory loan.

4. Prepare financial documentation

To apply for a debt consolidation loan, you’ll need to have your business financials in order. This means having your most recent tax filings, updated cashflow projections, a profit-and-loss statement, and a balance sheet ready to submit to a lender.

5. Apply for a debt consolidation loan

After identifying the best options for your business, contact lenders directly or apply online. Depending on the lender, it will take several days for them to review your application and financial documentation. Be ready to respond to follow-up questions and review so that you can keep the process moving forward efficiently.

6. Evaluate offers

If you receive several offers, compare them based on interest rates, repayment terms, and any additional fees. It can be helpful to compare the Annual Percentage Rate (APR) of each option to get a real apples-to-apples comparison. Be sure you fully understand everything about the loan, including prepayment penalties or late-payment fees (which, hopefully, you’ll never incur).

You’ll also want to ask if the lenders offer lower interest rates if payments are automatically withdrawn from your business checking account each month, for example, or other incentives that make repayment easier.

7. Close on the loan and pay off existing debts

Depending on your lender’s requirements (and, sometimes, your preferences), they will often directly send the consolidation loan funds to the outstanding lenders. This ensures that the funds are used to pay off outstanding balances. If you receive a lump sum, it’s critical to pay off the other balances or you risk essentially doubling the amount of debt you have.

8. Set up a new payment plan

Now that you’ve rolled most or all of your existing business debt into a single loan, it should be easy to track and pay it as agreed. It will be even easier to manage if you set up automatic payments that can be deducted from your business checking account each month. Congratulations! With these steps completed, you’re on your way to better managing your business’s finances.

Pursuit has loans for business debt consolidation and much more

Pursuit is a leading lender serving small businesses across New York, New Jersey, Pennsylvania, and Connecticut. We provide more than 15 business loans and a line of credit that can be used to consolidate high-cost business debt, as well as for working capital, equipment purchases, commercial real estate purchases and renovations, inventory, and much more. We’ve helped thousands of small business owners get the funding they need to achieve their goals and dreams and we can help you, too. Contact us today to learn more!

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