How to Consolidate Business Debt

How to Consolidate Business Debt

How to Consolidate Business Debt

Running a small business is tough — between scheduling employee shifts, keeping inventory stocked, and taking care of your customers, your hands are full. Luckily, when it comes to managing multiple loan payments with various due dates, there’s a solution to make your life a bit easier: you can consolidate business debt. 

With business debt consolidation, you take two (or more) existing loans and consolidate them under one new loan with a single monthly payment. Business debt consolidation makes repaying business debt more manageable, and in some cases, more affordable (especially if you’re consolidating higher interest forms of debt like merchant cash advances or credit cards). 

What is Business Debt Consolidation? 

When it comes to consolidating business debt, the process is pretty straightforward. 

  1. Decide which business debts you want to consolidate. 
  2. Apply for a new small business loan. Once you’re approved, you use the proceeds from the new business loan to pay off the business debts you’re consolidating. You then make payments on the new loan, per the agreed upon terms. 

You can choose to consolidate some or all forms of your business debt. If your business has continued to grow since you took on the initial loans you are consolidating, it is likely that your new interest rate will be cheaper, thus saving you money. The purpose of business debt consolidation is to make repayments more manageable, and potentially, to save you some money. 

Does Consolidation Make Sense for You?

When it comes to business debt consolidation, there are a couple of factors that come into play. 

Your chances of being approved for a consolidation loan, and the terms you secure, are impacted by both your personal (and business) credit score, as well as your payment history and the current financial health of your business. So, if your credit score has improved since you initially took on debt, you could be approved for a business consolidation loan with a lower rate or a longer repayment term. 

Prior to diving into the process, it’s important to do some research to determine if consolidating debt makes sense for you, and the most effective way to do so.

How to Consolidate Your Business Debt

  1. Tally up your business debts: Regardless of whether you have loans, credit cards, merchant cash advances, lines of credit, or a combination of all of the above, it’s important to do a thorough review of each existing business debt. Make sure to note the amount owed, the interest rate and repayment term. Revisit your existing loan agreements to see if there’s a prepayment penalty — this could impact whether or not it financially makes sense to consolidate the debt. At the very least, you want to account for this penalty when you’re determining the amount of money you need to borrow. 
  2. Decide which debts to consolidate: With all the important details about your existing debt on hand, you can now make an informed decision about what you’d like to consolidate. Depending on your goals for consolidating, as well as your current loan terms, you may choose to consolidate some, or all, of your debt. 
  3. Calculate the amount you need to borrow: Once you’ve determined the debts you’d like to consolidate, add the amounts up to figure out how much you need to borrow. 
  4. Research your options: Do your due diligence and compare offerings from different lenders. Pay attention to the annual percentage rate, any loan fees, and the repayment terms. You won’t have an exact idea of what to expect until you’re approved and receive an offer, but doing some legwork in the beginning can at least provide you with a general idea of what to expect. 
  5. Prepare for the application: Gather all the necessary paperwork to avoid any bottlenecks in the application and approval process. You will likely be asked to supply financial projections, tax returns, and current bank statements for both you and your business. 
  6. Submit your application: And wait for the word. 

If you’re approved (congrats!), you’ll use the new funds to pay off your existing loans. Ask your original lenders for up-to-date payoff amounts (to account for any interest or finance charges that may have accrued). And once you’ve paid off your existing loans, follow-up with each respective lender to ensure your balance is zero. 

You’ll then begin making payments on the consolidation loan, as set forth in your new agreement.

This article was originally written on February 21, 2020 and updated on June 25, 2020.

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Michael Jones

Michael Jones

Michael Jones is a senior editor for Funding Circle, specializing in small business loans. He holds a degree in International Business and Economics from Boston University's Questrom School of Business. Prior to Funding Circle, Michael was the Head of Content for Bond Street, a venture-backed FinTech company specializing in small business loans.

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