How to Consolidate Business Debt

Business debt consolidation offers a streamlined solution by combining various debts into a single obligation with one consistent payment. This approach simplifies financial management, can enhance cash flow predictability, and potentially reduce costs through lower interest rates.

Our best debt consolidation loans provide pathways to financial clarity, but selecting the right strategy matters. The right approach depends on your specific business factors. Understanding the pros and cons is essential to make an informed decision that supports your long-term business goals.

What Is Business Debt Consolidation and How Does it Work?

Business debt consolidation combines multiple business obligations into a single debt with one monthly payment. This approach works well when your company struggles with payment management, qualifies for lower interest rates through consolidation, or needs financial simplification to enhance operations.

"If you're struggling to manage multiple payments, business debt consolidation can simplify your business finances and relieve the stress of committing to multiple debt payments," explains Henry Bolland, commercial finance broker at Mill Wood Finance.

The business debt consolidation process typically follows these steps:

1. Evaluate your current business debts to identify consolidation candidates.
2. Apply for a new loan or credit line and use approved funds to pay off existing debts.
3. Make a single monthly payment to the new lender until the debt is fully paid.

Business loan applications require more extensive documentation than personal loans. Lenders typically request:

• Personal information: Identity verification and financial records.
• Business documentation: Incorporation articles, legal documents, tax returns, bank statements, financial statements, business credit reports, and additional supporting materials.

Pros of Consolidating Business Debt

There are many potential benefits to business debt consolidation, including:  

• Simplified finances: Combining multiple debts into one eliminates juggling various creditors, payment amounts, and due dates. This streamlines your financial management and improves cash flow predictability.
• Lower interest rates: Replacing high-interest debts (like credit cards) with lower-interest options (such as business loans) can reduce monthly payments and generate significant long-term savings. These freed funds can be reinvested into your business operations.
• Faster debt repayment: Consolidation can accelerate your path to debt freedom, either by securing a shorter repayment timeline or applying interest savings toward early principal payments.
• Improved credit profile: Depending on how the debt is structured, paying off existing debts and maintaining consistent payments on your consolidated loan can strengthen both personal and business credit scores.

“Business debt consolidation is a good solution if you have multiple business debts with various providers, your broker can access more competitive interest rates and repayment terms compared with your current debt, [and] you have steady revenue to support the consolidation payments,” says Bolland.

Cons of Consolidating Business Debt

There are also some potential downsides to business debt consolidation, such as:

• Qualification requirements: Business loans typically require more documentation than personal loans. You'll need good credit—whether personal, business, or both—to qualify for favorable terms, which can limit options for newer businesses or those with challenged credit histories.
• Financial implications: Consolidation might extend your payment timeline if your new loan has a longer term, and additional costs like origination fees and transfer charges can add up. Be sure to understand all potential expenses before applying.
• Risk to business assets: With secured business loans, your assets serve as collateral. If payments fall behind, the lender could claim those assets.
• Underlying problems persist: "Consolidation doesn't solve operational inefficiencies, poor cash flow management, or other systemic financial problems that may have led to excessive debt in the first place. It's important to focus on improving these aspects of your business finances when considering or applying for a consolidation loan," says Bolland.

Consolidating Business Debt: Tools and Strategies

Several effective options exist for consolidating business debt. Consider these approaches:

Business loans

• Fixed terms: Traditional business loans offer predictable fixed interest rates, consistent monthly payments, and a defined repayment timeline.
• Simplified management: "After consolidating, the business makes a single monthly payment to the new lender, rather than juggling multiple creditors and deadlines, which may cause confusion," explains Bolland.
• Professional guidance: "Work with a reputable lender/broker to avoid predatory practices... take legal advice to ensure you are in good hands regarding the financial terms of the loan agreement."

SBA Loans

The US Small Business Administration (SBA) offers government-backed, low-interest loans from specific lenders to qualifying businesses. SBA loans often come with favorable terms and a wide range of loan amounts, from $500 to $5.5 million.

However, there are specific requirements, including that the business must meet the SBA’s definition of a small business and that you must have exhausted financing options with private lenders. 

Personal loans

• Accessibility for small businesses: Easier qualification process for sole proprietorships or very small businesses that may not qualify for business-specific consolidation.
• Faster funding: Personal loans typically feature simpler application processes and quicker approval times than business loans.
• Limitations to consider: Lower borrowing limits than business loans and potential blurring of personal/business finances that may create complications for accounting, taxes, and liability protection.

Private or alternative lenders

If you can't qualify for a traditional loan or SBA financing, consider exploring alternative lenders that offer flexible borrower requirements. These options might provide favorable terms better suited to your smaller business, or if you lack access to conventional financing.

Alternative lenders include private lenders, online lenders, crowdfunding platforms, and peer-to-peer lending networks.

Balance transfer credit cards

• Low introductory rates: Shift existing card balances to a new card offering special rates, sometimes as low as 0%, potentially saving significant interest costs.
• Flexible promotional periods: These introductory rates typically last from six months to over a year, giving you time to pay down debt before standard rates apply.
• Setup simplicity: Getting started with a balance transfer card and initiating transfers is straightforward and quick.
• Cost considerations: Be aware of balance transfer fees (typically 3% to 5% of each transferred amount) and higher standard rates that apply to any remaining balance after the promotional period ends.

Business Debt Consolidation Alternatives

Debt consolidation isn’t the only way to better handle your business debt. Here are some common alternatives: 

• Loan refinancing: Most lenders allow you to refinance individual business loans for better interest rates or repayment terms. Unlike consolidation, you'll need to handle each loan separately. Refinancing involves lender fees and closing costs for each loan you modify.
• Loan restructuring: Your existing lenders may offer various restructuring options, including temporary interest rate reductions, payment date adjustments, term extensions, alternative repayment plans, or even debt-for-equity swaps where you exchange debt for ownership shares in your business. You'll need to negotiate with each lender individually.
• Cash flow improvements: If debt payments are straining your business, focus on improving cash flow. You could negotiate with your suppliers, look for areas to cut costs, push to increase revenue, or even consider liquidating some assets to pay off debt.
• Bankruptcy: While bankruptcy should only be considered as a last-ditch effort to save your business or protect your finances, it can offer debt relief. 

Here's what you need to know about bankruptcy:

• Chapter 11: Restructures your business finances and debts while keeping operations running, allowing you to pay creditors over time.
• Chapter 7: Liquidates your business assets to distribute among creditors. Sole proprietors can be released from remaining liability, though corporations and partnerships cannot.
• Chapter 13: Allows individuals and sole proprietors to reorganize finances through a court-approved repayment plan based on their business revenue, debts, and assets while continuing operations.

Frequently Asked Questions

Is debt consolidation a good idea for a business?

Yes, debt consolidation works well for businesses struggling with multiple payments or high interest rates. It's most beneficial when you qualify for better terms than your current obligations and when your cash flow supports consistent payments of the consolidated amount.

Does the Small Business Administration (SBA) offer debt consolidation loans

Yes, the SBA provides government-backed loans that can be used for debt consolidation with competitive terms. These require meeting strict eligibility criteria and proving you've exhausted traditional financing options before qualifying.

Can you be personally liable for business debt?

Yes, you can be personally responsible for business debt in several situations: when operating as a sole proprietor or general partner, when you've signed personal guarantees, when you've failed to make required tax payments, or when you haven't properly maintained your corporation or LLC's legal status.

Conclusion

Business debt consolidation offers a practical solution for simplifying your financial obligations and potentially reducing costs. While it won't solve underlying operational issues, consolidation can provide breathing room to implement strategic improvements.

Consider your specific business situation, compare options carefully, and consult with a financial advisor before proceeding. With the right approach, consolidation can strengthen your financial foundation.