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How to Get a Small Business Debt Consolidation Loan

Published: Jul 26, 2023 14 min read

Getting a small business debt consolidation loan can streamline your monthly payments and potentially improve your cash flow if your small business has several debts. In this article, you’ll learn about how to get a small business debt consolidation loan and the pros and cons of debt consolidation. We’ll also show you other debt-relief options so you can decide what’s best for your business’s finances.

To learn more about this type of financing, explore our list of the best debt consolidation loans.

What is a small business debt consolidation loan?

A small business debt consolidation loan is intended specifically for businesses looking to consolidate their existing debt. Debt consolidation is the practice of taking several debts and combining them into a single loan. The benefits of a business debt consolidation loan may include:

  • Having one streamlined monthly payment
  • Lowered interest rates
  • A longer repayment period with lower monthly payments

Now that you know what a debt consolidation loan is, let’s explore how they work and how to get one.

How do debt consolidation loans work for small businesses?

Small business debt consolidation loans work similarly to personal debt consolidation loans: You identify the debts you want to combine and take out a loan that equals the payoff amount of them all. Once you receive the funds from the new loan, you pay off all the individual loans and start making monthly payments on the debt consolidation loan. The lender may pay off your outstanding loans directly or transfer the funds to your account so you can do it yourself.

For example, if your business has a business credit card with an outstanding balance and several equipment loans, you can take out a debt consolidation loan and pay off all those individual loans. Then, instead of making payments on each loan every month, you’ll make one monthly payment on the new loan.

Debt consolidation loans are often confused with debt refinancing, but they’re not the same. With a refinance loan, you take out a new loan to improve the rates and terms of one existing loan rather than combining multiple loans. This may reduce the amount you pay each month but won’t reduce the number of individual monthly payments you make.

How much debt is OK for a small business?

Because business incomes vary, it’s difficult to say how much debt is acceptable for any one small business. How much debt your business can handle is based on a variety of factors, such as how much revenue your business generates and the type of debt. A business netting half a million dollars can usually afford more debt than a business only making $100,000 in annual profit.

When evaluating your business debt, consider the following:

  • The type of debt you have: Good debt is defined as any debt with a low interest rate or that’s used to increase how much money you can generate. Bad debt, on the other hand, is considered any debt that won’t help you generate income, like a cash advance loan to cover a budget shortfall at the end of the month.
  • Your debt-to-income (DTI) ratio: Your debt-to-income ratio compares your monthly debt payments to your gross monthly income. If you want to make a profit or qualify for a loan, you want your monthly income to be higher than your monthly debt payments. Experts recommend keeping this ratio below 50% — anything higher is a red flag for lenders.

How to get a small business debt consolidation loan

How to get a small business debt consolidation loan varies by lender, but the process is generally as follows.

1. Calculate the total amount of debt that you owe

Start by totaling how much of your business’s debt you want to consolidate. Once you know that, determine how much of a monthly payment you can afford. It’s also helpful to factor in how much total interest you’d pay over the life of the loan. An online business loan calculator or a financial expert can help you do this.

Compare the monthly payment and lifetime interest for the business consolidation loan to what you’re currently paying. If that new amount is less than what you’re currently paying and your current loans don’t have any prepayment penalties, a business consolidation loan is probably a good idea.

2. Evaluate your personal and business credit scores

The next step is to pull your personal and business credit reports. You can get your business credit report for free from Dun & Bradstreet using its free CreditSignal program or you can use Nav.com. Personal credit reporting agencies, such as Experian and Equifax, allow you to pull a free personal credit report once a year. Reviewing your credit report can help you:

  • Identify any discrepancies on your report and resolve them before applying for a new loan.
  • Better estimate your interest rate, as having a higher credit score than when you initially applied for your loan will typically result in lower interest rates.

You’ll need both your business and personal credit reports, as lenders will want to see both before offering you a loan. With most business loans, the lender requires a personal guarantor, usually the business owner, who assumes responsibility for the debt if the business defaults.

3. Decide what type of loan you want to use to consolidate debt

There are multiple options for debt consolidation loans. Explore your options and find the best for your needs by comparing maximum loan amounts, interest rates, additional fees and repayment schedules.

Traditional loans

Traditional loans from banks and credit unions are the most common types of debt consolidation loans. However, they can be hard to get, especially if you lack a strong credit history or haven’t been in business long. The approval process tends to take longer for these types of loans compared to online options.

Online loans

Consider an online lender if you need quick funding or your credit isn’t strong enough to qualify for other types of business consolidation loans. These loans are offered by non-traditional sources and alternative lenders, such as crowdfunding platforms, peer-to-peer lenders and private lenders. However, you’ll most likely have to pay higher interest rates than you would with traditional loans. Other factors, such as repayment terms, vary by lender.

Small Business Administration (SBA) loans

The SBA is a federal agency that supports small businesses. The SBA provides many different services, including financing options for debt consolidation. If you don’t qualify for a traditional loan, you may qualify for an SBA loan. However, the SBA still requires a strong credit history, and the approval process can take a while — typically, between 60 and 90 days for an SBA 504 loan.

4. Gather your business documentation and complete the application process

Once you know what type of business debt consolidation loan you want, gather the required documentation and complete the lender’s application. Required documents and application processes vary by lender, but you can expect to share the following:

  • Basic personal information, such as your Social Security number, address, income and existing debts
  • Your business plan
  • Proof of business ownership
  • Proof of business insurance
  • Proof of licensure to conduct business
  • Two or more years of financial statements, such as business tax returns, bank statements, profit and loss statements and cash flow projections
  • List of debts to be consolidated, including payoff amounts and lender information

Once you submit everything required, you may have to follow up on your application status with the lender until you receive a decision. Some lenders will let you know your status the same day, while others may take weeks.

5. Sign your loan agreement and begin making loan payments

If a lender offers you a loan, review the paperwork before accepting the terms. Ensure everything is accurate and ask questions about anything you don’t understand. Then sign the document.

After you sign the loan paperwork, your new lender may pay off the individual debts directly. Alternatively, the lender may release the funds to you directly, in which case you’ll need to pay off your individual loans yourself. Then start making your new monthly payment.

Other small business debt relief options to consider

A debt consolidation loan isn’t the only financing tool you can use to streamline your debt payments. Here are some other small business debt relief options to consider:

  • A business line of credit: With a business line of credit, a lender extends a certain amount of credit, similar to a credit card limit. You access the credit you need when you need it and then pay it back with interest. Often, a business line of credit offers lower interest rates than a credit card, but unlike a credit card, it may require collateral.
  • Balance transfers to a business credit card: Many business credit cards offer introductory deals with a 0% balance transfer APR. As long as you pay off the debt before the introductory period expires, you’ll save money on interest. Always check to see if the credit card has a transfer fee, as some fees may be too high for this option to make sense.

Should you consolidate small business debt?

There are several pros and cons of debt consolidation to consider before taking out a debt consolidation loan.

The pros of small business debt consolidation

Consolidating small business debt has many potential benefits:

  • It may allow you to pay back debt faster. When you consolidate debt, you may be able to access a lower monthly payment if you extend the repayment term. You may also qualify for a lower interest rate. That said, if you can pay more than the monthly payment, you’ll pay off this single debt faster than you would have paid off all the individual loans.
  • It replaces multiple monthly payments with one. One monthly payment is much easier to keep track of than several monthly payments with multiple due dates.
  • It may increase your cash flow. If you have a lower monthly payment, you’ll have more cash each month to put toward other purchases you need to improve your business.
  • It may increase your credit score. If you struggled to make multiple monthly payments, switching to one monthly payment makes it more likely you won’t miss a payment. This can help improve your credit score over the long term.

The cons of small business debt consolidation

However, consolidating your business debt does have some downsides:

  • You may end up with a higher interest rate. Factors like your personal credit score and the state of the economy can affect your interest rate, for better or worse. If national interest rates are higher than when you applied — or your credit score is lower — consolidating your debts may end up costing you.
  • You may pay more in interest. Even if your interest rate goes down, by extending the terms of your loan, you may end up paying more in accumulated interest by the time the loan is paid off. To avoid this, try to pay more than the minimum payment each month.
  • You may have to pay additional fees. New loans often come with origination or closing fees, and your existing loans may charge you a prepayment fee if you pay the debt off sooner than expected. Identify any relevant fees and add them up before consolidating. If the fees are more than the amount of money you would save over the life of the consolidation loan, it’s probably best not to take out the new loan.

Summary: How to get a small business debt consolidation loan

When evaluating how much debt your business has, consider whether it’s good or bad debt and look at your debt-to-income ratio. To streamline your debts, you can take out a small business debt consolidation loan. These loans are available from banks, credit unions, the SBA and online lenders.

Debt consolidation loans can lower your monthly payments, lower your interest rate, increase your cash flow and even improve your credit over the long term. However, they’re not the best option in every scenario, especially if the interest rate isn’t lower or you have to pay a significant amount of additional fees.

If you aren’t sure if you should take out a debt consolidation loan for your business, consider meeting with a small business debt relief expert. They can help you explore all the best debt relief options.