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Business Debt Consolidation – Everything You Need to Know

business debt consolidation blog feature image - scales with income on one side and debt on the other

Business debt consolidation does exactly what you might expect; consolidate a number of varying business debts into a new agreement. 

It’s no surprise that many small and medium-sized businesses have resorted to multiple types of debt finance to get them through the last few tumultuous years. Continued inflationary pressures have driven the need for external financing upwards and previous low-cost debt has had to be refinanced at higher rates putting even more strain on business owners. 

Although debt finance offers a tax advantage and is an essential growth tool for most businesses, over-leveraging can mean an erosion of the flexibility which business owners work so hard to preserve and business debt relief then becomes an appropriate and necessary strategy for survival. 

Recognizing the Risks of Liquidity Constraints

Keeping track of multiple debt types, payments, interest rates and amortizations is a major feat in itself but aside from time constraints, servicing debt obligations can result in some unwanted scenarios. 

If the business is struggling to make debt payments, oftentimes it will cut back on all types of expenditure. The downside of blanket cuts is to put the company in an unfavorable position as they find they’re…

  • Unable to exploit market and investment opportunities;
  • Reducing sales forecasts;
  • Unable to raise necessary finance when they really need to;
  • Changing operational and product strategies that lead to company devaluation;
  • Losing market share as competitors move in and take advantage of their inability to pivot and invest. 

Once a business is in this position, a consolidation loan may be the only way to move forward with a single, predictable debt repayment to replace all the others. 

Where Can you Get a Business Debt Consolidation Loan? 

Most lenders, traditional and otherwise, will consider applications for debt consolidation loans, however the businesses will need to meet their specific qualification criteria. In general, as with any business finance, a good credit score, time in business and revenues will impact which lenders are accessible to you. The three main options for a loan will be traditional bank financing, SBA loans or an alternative lender. 

Traditional bank loans and SBA loan providers are typically very difficult to qualify for, have a lengthy application process and strict guidelines on how the loan can be utilized for debt consolidation. Many small businesses that have taken on multiple sources of high interest debt will find that debt consolidation through traditional sources is simply outside of their reach. At a time when they’re already struggling to meet their repayments, quick and straightforward access to finance is crucial to maintaining liquidity. 

Time in business will be a key consideration for lenders too and even online funding providers quite often require over two years trading history and may look at personal credit rating as an indication of creditworthiness. 

Nevertheless, if your prospects are encouraging, there are alternative finance companies that support business owners in getting back on track and achieving their potential. These lenders will be more interested in finding out what your future revenue could be rather than looking at your current situation. 

What’s the Difference Between Debt Consolidation and Debt Refinancing? 

Confusingly, you may hear the terms debt consolidation and debt financing used interchangeably although they are two entirely different approaches. 

Debt consolidation involves combining several different loans or other finance products such as Merchant Cash Advance (MCA) or credit cards into one new loan. By doing this, costly short-term loans may be eliminated and replaced with a longer term loan which allows you to potentially reduce your monthly payment. Alternatively, the long-term goal might just be to reduce the time it takes to repay a loan. 

Unlike debt consolidation, debt refinancing really only requires you to have one existing loan in order to benefit. Refinancing involves replacing one loan with another for a very specific purpose; to get a better rate on a business loan, extend the term of a loan or increase the principal amount for example. 

Whether consolidating multiple debts or refinancing a single loan, both can be used with the objective of paying less over the long-term and freeing up valuable working capital for investment. 

How Do You Know if Debt Consolidation is Right for Your Business?

If you’ve been feeling overwhelmed with debt commitments and have felt as though they’re getting in the way of growing the business, it’s maybe a good time to review what’s happening. As interest rates continue to increase, so too does the cost of borrowing and periodically reviewing your obligations is a good habit to create. 

Start by identifying all your debts and creating a debt management schedule which details all debts with specific information on each one including;

  • Lender’s name and address;
  • Original loan amount;
  • Date original loan taken out; 
  • Payment amount;
  • Payment frequency;
  • Interest rate;
  • Annualized repayment total;
  • Repayment penalties; 
  • Date of maturity;
  • Secured or unsecured status.

It might feel like a lot of work, but completing this process will allow you to identify which debts are the most problematic. A quick review of your debt schedule will quickly reveal what’s causing issues, whether it be due to the size and frequency of payment, annualized repayment amount, amount of time left to repay or a combination of these things which are impeding progress. 

Having all your debt information readily available will also save a lot of time when it comes to comparing lenders for consolidation. Whilst there is no ‘one-size-fits-all’ to creating a business debt schedule, a simple template like this one from ‘Template Roller’ will get you started. 

Once you’ve decided that debt consolidation might be appropriate, you can approach lenders with a realistic view of the loan required including APR calculations which take into account any fees that might be due on repayment. Comparing the APR of old and new loans will enable you to see whether debt consolidation makes financial sense for your business and goals. 

Bank financing and SBA loans will likely offer the most attractive terms, however meeting the qualification requirements could preclude many businesses from applying; typically banks and SBA lenders will only entertain applications from businesses with a business credit score of 75 or above (out of a total 100). Alternative finance companies provide other options for businesses to improve cash flow when burdened with too much debt – cash flow loans, accounts receivable, purchase order and equipment finance can be used standalone or packaged to provide the influx of working capital needed. 

Making Sense of Business Debt Consolidation

Consolidation of business debt can be a great long-term solution to the short-term headache of juggling multiple, expensive repayments and can strengthen the business’ financial standing. As always, we’d recommend seeking the advice of your business accountant or financial advisor before committing to a debt consolidation loan. 

If there are signs that it’s time to restructure your business finances, reach out and we can share the work that we’ve done with other SMEs in streamlining finances and creating opportunities for business growth. 

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