Business Debt Consolidation Loan

Financing your business can sometimes feel like a juggling routine, especially when dealing with account balances, lines of credit, and loans from a variety of sources

You can save yourself some stress by considering a business debt consolidation loan to help get a handle on your debt.

But is business debt consolidation right for you? Are there risks involved? Let’s start with some of the basics of how this process works and learn more about how these loans might help you manage your financial obligations.

What Is Business Debt Consolidation?

You may already be familiar with the concept of consolidation at the level of consumer debt, but the principles apply to the business community as well. Debt consolidation allows you to merge the balance on your loans, lines of credit, and cash advances into a single payment.

Business debt consolidation can sometimes be confused with debt refinancing, but these two strategies are quite different. 

Refinancing simply involves replacing one loan with another one, usually to achieve a shorter loan period or better interest rates. Consolidation uniquely replaces multiple loans with a single loan to achieve one monthly payment. 

FURTHER READING: A Business Owner's Guide to Business Loans

Things to Watch Out for When Consolidating Your Business Debt

The primary advantage of debt consolidation is that it reduces multiple bills down to one. While this certainly sounds attractive, there are several things to consider before consolidating your business debts:

  • Are the interest rates lower than the loans you’re currently paying?
  • Will the business consolidation loan fully cover your existing debt?
  • How does the loan term compare to your current loans?

In other words, not all consolidation loans are created equal. It wouldn’t be wise to exchange your current obligations for one that offered a higher interest rate or a longer loan period. Nor should you take out a loan for less than your total current obligations.

Pros and Cons of Consolidating Your Business Debt

Is a business debt consolidation loan right for your business? To answer this question, you’ll have to learn more about the strengths and weaknesses of consolidating your business debt.

Advantages of a Business Consolidation Loan

Consolidating your business debts can provide many advantages. A business consolidation loan can:

  • Reduce the total number of monthly bills and payment deadlines
  • Lower your interest rate, which can boost your company’s cash flow
  • Boost your credit score when you improve your payment history with one payment

These advantages can make debt consolidation an attractive option for business owners who are struggling to manage multiple bills from multiple lenders with multiple interest rates. This relief means that the greatest advantage of consolidation might be the reduced stress that comes from better financial management

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Disadvantages of a Business Consolidation Loan

Before you rush into one of these loans, there are several possible drawbacks that you should carefully consider:

  • Interest rates may not be lower with a consolidation loan
  • You may extend the length of your loan, generating more interest long-term
  • Consolidating your bills might not help your business

This last point is worth exploring further. If your company is struggling financially, it’s important to consider the reasons why. Consolidating your debts can help you manage your past obligations, but it will do little to improve cash flow if your business isn’t thriving in the current market.

Options for Consolidating Your Business Debt

If you’re interested in a business debt consolidation loan, you have several options to choose from:

SBA Loans

Backed by the U.S. Small Business Administration (SBA), SBA loans offer the best interest rates and flexible loan terms. However, business owners may have to show strong credit in order to be approved.

Traditional Bank Loans

Depending on your financial situation, you may be able to find a bank that offers you rates and terms that are highly competitive. But like SBA loans, these loans are reserved for highly-qualified entrepreneurs.

Alternative Lenders

Some business owners may want to look into alternative lenders, some of which offer peer-to-peer lending options and other flexible features that can be used by businesses that struggle to qualify for traditional types of loans.

How Will Debt Consolidation Affect My Business Credit Score?

If you have outstanding debt, you might already see the negative effects on your credit score. This condition is especially true if you have trouble keeping track of payment deadlines and find yourself paying bills later than you should.

A business debt consolidation can help your credit score in these circumstances. Consolidating your debts can lower your credit utilization rate and diversify your credit history, giving your business credit score a slight boost. When your debts are rolled into one monthly payment, you’ll also find it easier to pay your bill on time.

However, adding a new line of credit can lower your score, at least temporarily. Plus, once you pay your creditors through a consolidation loan, you’ll have to avoid using the credit you’ve freed up. Otherwise, using 25% to 33% of your existing credit can lower your business credit score.

How to Get a Debt Consolidation Loan

Now that you’ve learned more about your options, let’s walk through the steps of obtaining a business debt consolidation loan:

Check Your Credit Score

Most lenders will expect businesses to have a credit score of 650 or higher, though some may be willing to work with businesses with a score of 500. This consideration may be a good reminder that it’s always best to be proactive and consolidate your debt before it has a dramatic effect on your company's financial health.

Go Through the Interview Process

Before approving a business debt consolidation loan, a member of your lender’s underwriting staff will interview you to determine your eligibility for the loan. You may be asked to present copies of your financial documents during this interview, which is why you might complete this step and the next together.

Gather Your Financial Documents

Your lender will likely request copies of documents such as:

  • Personal and business tax returns
  • List of outstanding debt
  • List of current assets
  • Profit and loss statements
  • Balance sheets
  • Financial forecasts/sales projections

In most cases, you’ll be asked for several years’ worth of financial documentation to evaluate the strength of your business. If you are looking for an easy way to manage your finances, Quickbooks is a tool that helps you begin managing business finances quickly and smoothly. 

Have Your Lender Perform a Review

Your lender will perform an initial review, and if you pass, you’ll receive an initial prequalification letter that spells out the terms of your loan.

However, this isn’t the end of the process. The lender will now begin due diligence and perform a more thorough review of your financial history and tax records. If you pass this step, you’ll receive a commitment letter.

There is a third and final phase to the review process. Your lender will look at your payment history from the past 12 months and check the documentation related to your original loans. 

Close the Deal

Neither the prequalification or commitment letter will be enough to secure your loan. Your final step will be to sign the loan origination documents. Once you do, you’ll have your business debt consolidation loan.

Melio Payments is a capital tool that might come in handy as a way to make sure those payments are on time. If you are looking for an easy way to get checks where they need to be quickly, Melio Payments can help with that.

Change the Way You Fund Your Business

Get loan offers that meet your specific business needs from several funders through Fundid Capital. Complete your application in as little as 15 minutes and work with a Fundid Advisor to pick the solution that works best for your growth goals. Explore your options