To consolidate debt, business owners need to take out a new, larger loan to pay off all of their existing loans and other forms of credit. This way, rather than make separate payments on multiple business loans, you roll all of your debts into one loan and make a single monthly payment.
The new loan may have a lower interest rate or a longer repayment term than your previous loans, giving you more time to pay off debt with smaller payments. Keep in mind, however, that the longer the term on your loan, the more you’ll pay in interest over time.
Business debt consolidation can provide relief if you’re able to find a loan with a lower interest rate than your current debts. But you may still owe fees to the new lender, such as an origination fee to process the new loan. Before signing on the dotted line, make sure that a debt consolidation loan will save you money and won’t end up being more expensive than your current financing.
How to get a business debt consolidation loan
Getting a business debt consolidation can be a long and complex process. While the method of getting a loan varies from lender to lender, these are typically the steps you’ll need to take.
- Assess your current business debt and make a list that includes each loan balance as well as the terms and APR on each loan or form of credit. Be sure to research relevant details, such as prepayment penalties, so you aren’t penalized if you decide to take out a debt consolidation loan.
- Check your credit score to see what kind of loans and lenders you may qualify with. Many lenders weigh your credit score heavily when choosing whether to offer you a loan, so you’ll want to make sure your credit score is in a good place before beginning the process of applying. Some types of loans, like SBA loans, may have more flexible requirements for borrowers, so be sure to check lenders’ criteria before filling out an application.
- Shop around for business debt consolidation loan options and compare offers from several lenders to see what kind of rates and terms you may be eligible for. You don’t have to accept the first offer you’re given. This may help you in saving money in the long run, particularly if you can secure a lower interest rate.
- Gather the required documentation to submit your application to lenders. While each lender has varying requirements, most typically ask that you provide documents such as a profit and loss statement, a cash flow forecast and business plan. During this process, you also may have to do an interview with the lender’s underwriting team and submit to a background check on your tax background and original loans. If you’re officially approved, you’ll need to sign the final paperwork.
- After you’ve accepted a business debt consolidation loan, you’ll need to use the funds to pay off your existing debts. Typically, your new lender will handle this, but it’s important to confirm that the payments were made, as missed payments to your old lenders could reflect on your credit profile.
Alternatives to business debt consolidation
Business debt consolidation vs. refinance
Refinancing business loans is another debt relief strategy, but it differs from debt consolidation. Business debt consolidation involves taking out one new loan to pay off multiple loans, while refinancing refers to taking out a new loan to pay off one single loan.
If you have several debts to repay, you’d likely turn to debt consolidation. If you want to replace one existing loan with a new loan that may have better rates and terms, you would typically refinance your debt rather than consolidate.
Both options are designed to help you manage your debt and possibly secure a lower interest rate and longer repayment terms. The amount of debt you currently have would be the deciding factor in whether you pursue consolidation or refinance. You may be able to refinance your loan with your current lender.
Business debt consolidation vs. restructuring debt
Another way to manage business debt is to work out an arrangement(s) with your current creditors. You may want to consider writing a hardship letter when submitting your request. This document would reflect why you need to restructure your business debt, including financial statements to reinforce your claims. Being open about your circumstances could help your case.