An in-depth guide to business debt consolidation loans

Running a business requires intense focus and entrepreneurial spirit. However, if you have high-interest debt, large monthly payments, and wasteful interest charges, they can be big distractions. With business debt consolidation, small business owners can tackle their existing debt into a single payment, improving cash flow and cutting expenses. 

Here's everything you need to know about getting a business debt consolidation loan, including what loan options are available and what to look for when consolidating debt.

What is business debt consolidation?

Business debt consolidation is the process of paying off existing debt from multiple loans into one small business loan. Typically, you'll be able to save money by reducing your interest rate and lowering your monthly payment. Some loans offer longer repayment terms, which can lower your monthly payment even more. It’s important to remember, while this improves cash flow, extending the repayment term can increase the total amount of interest you'll pay.

When paying off credit cards and small business loans, you can either keep those accounts open or close them. Keeping business credit cards open provides flexible financing options in case of emergency or when cash is tight. However, those credit lines may be too tempting for some small business owners and can lead to repeating the debt cycle in the future.

Ways to consolidate your business debt

Getting a loan to consolidate your business debt is a smart choice for small business owners who want to control their finances. It enables you to consolidate multiple loans into a single loan with one monthly payment. Here are a few of the business debt consolidation loan options to choose from.

Business debt consolidation loan

A small business debt consolidation loan is a smart choice for established businesses that have a strong record of profitability. Lenders review your personal and business credit scores, business profitability, and personal income when analyzing loan requests. 

You can take out a conventional term loan from a bank, credit union, or online lender with or without assets securing the loan. Some lenders can provide an immediate decision, while others take longer for an in-depth review of your finances.

SBA loan

An SBA loan is a term loan backed by the Small Business Administration (SBA). These loans are guaranteed by the U.S. government, so lenders are more willing to approve loans with longer repayment periods or for borrowers with lower credit scores. 

While there are many types of SBA loans, the SBA 7(a) loan is best for business debt consolidation. You can borrow up to $5 million and use the money for debt consolidation, working capital, purchasing equipment, and more.

Business line of credit

A business line of credit is another way to consolidate multiple loans into one. You'll receive a maximum credit line, and you can use it not only for business debt consolidation, but for other business needs as well. As you pay down your balance, you'll open additional credit that can be used to cover bills, fund expansion, or purchase inventory.

Balance transfer business credit cards

When opening a business credit card, one of its benefits may be an intro APR offer for balance transfers. These limited-time promotions allow you to transfer your existing debt from another business credit card or small business to the new card. You'll pay a one-time fee of 3% to 5% of the amount transferred, but you can avoid or reduce interest entirely during this promotional period.

While some personal credit cards offer intro APR offers for up to 21 months, business credit cards usually max out at 12 months. While this is a much shorter period, getting a 0% interest rate for one year can help you drastically reduce or eliminate your high-interest debt. Instead of paying interest to the bank each month, all of your monthly payment goes toward paying down your balance. 

To avoid incurring even more debt or impacting your debt payoff strategy, avoid using this card for new purchases. When the intro APR period expires, any unpaid balance will be charged the standard interest rate from that point on.

Home equity financing

Consolidating business debt can also be accomplished by pulling cash out of your home. Home equity financing typically offers lower interest rates than one can qualify for through your business. The loan is backed by the equity in your home, so if you cannot make payments, these loans put your home at risk — meaning it’s important to have a buyback plan..

Loan terms vary based on the type of home equity financing you choose. Here are three common options to access your home equity:

• Home equity loans. A home equity loan provides an immediate lump sum of cash that can be used for business debt consolidation. You'll have a fixed interest rate and a fixed monthly payment throughout the loan term.
• Home equity lines of credit (HELOCs). HELOCs have a maximum credit limit that you can borrow against. It has a variable interest rate, but you'll only pay interest on the amount borrowed during the draw period. As you repay the balance, you free up additional credit available to use for other purposes. After the draw period expires (typically 10 years), the balance converts to an amortizing loan with a fixed interest rate.
• Home equity investments (HEI). Home equity investments are ideal for small business owners with less-than-perfect credit or difficult-to-prove income. You'll receive a lump sum of cash, but you don't need to make monthly payments. Instead, you'll share in the appreciation of your home's value when you sell, refinance, or use another source of funds, anytime within a 30-year term. 

Pros and cons of business debt consolidation loans

Pros

• Eliminate high-interest debt
• Combine multiple payments into one
• Defined path to paying off your accounts

Cons

• Less flexibility on required monthly payments
• May not get approved due to the impact of high credit utilization
• Seasonal income volatility or low-profitability businesses may get denied

Frequently asked questions

Is business debt consolidation a good idea?

Yes, a business debt consolidation loan is a great idea because it makes it easier to take control of your finances. You'll consolidate multiple payments and loan balances into one monthly payment to eliminate high-interest credit card and business loan debt.

What are the requirements for a business debt consolidation loan?

Requirements for a business debt consolidation loan vary by lender and the type of loan you're applying for. Some debt consolidation lenders rely solely on your credit score, while others require multiple pieces of documentation, like tax returns, income statements, and bank statements. Take this into consideration when evaluating your small business loan options.

Do consolidation loans hurt your credit score?

While most lenders will check your credit when applying for a business debt consolidation loan, they typically don't report the loan on your personal credit report unless you miss payments. Consolidating credit card debt with multiple monthly payments into a single loan can improve your credit. Paying off credit cards that report to credit bureaus and avoiding missed payments are essential to maintaining good credit.

Where can I get a business debt consolidation loan?

Small business debt consolidation loans are available from a wide variety of lenders, including traditional banks, credit unions, and online lenders. It is best to get quotes from multiple lenders to compare interest rates, fees, monthly payments, and other requirements before submitting an application.

Final thoughts

Having multiple payments on existing debt can distract small business owners from focusing on their business. By taking out a business debt consolidation loan, you can get on track with your finances and pay off your debt. 

There are many different ways to consolidate business debt, including term loans, SBA loans, and tapping your home equity. Finding the best financing option depends on how much you owe, how much you can afford to pay each month, and what you can qualify for. Explore your financing options and compare quotes from multiple lenders before submitting your application.

Consolidate your business debt with no monthly payments, no income requirements, and no need for perfect credit — visit Point.com to learn more.