How Small Business Debt Consolidation Works

How Small Business Debt Consolidation Works

This is a guest post by Samantha Novick of Funding Circle

Debt isn’t a bad thing—far from it. Small businesses need money to make money, and that capital usually comes in the form of business loans or equity financing. However, equity is almost always more expensive. A loan gets paid off, but equity costs you a chunk of your business…forever. That’s probably why 74% of owners have financed their small business with debt in recent years.

Unfortunately, not all business investments turn out the way you planned. Sometimes, you turn to a loan to help you get out of a bind—and then you secure a working capital loan to help cover the previous one. Eventually, you end up stuck with too many loans, too many payments, and too high of interest rates.

If you’re ready to get out of this mess, consider small business debt consolidation. A debt consolidation loan can help refinance your existing debts, lower your interest rates, and bundle your payments into a single payment schedule. Plus, you can often secure more generous terms with extended schedules and less-frequent payments.

Sounds too good to be true? Fortunately for you, it’s not. Debt consolidation is a sound business strategy, even if you’re not struggling to make your monthly payments. Below, we’ll explain exactly how business debt consolidation works and why you may (or may not) want to explore it.

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How Does Small Business Debt Consolidation Work?

When your business debts become unmanageable, and you’re struggling to pay off multiple loans, debt consolidation can help. Debt consolidation converts your many debts into a single loan with an expected interest rate and single payment schedule.

For example, let’s say you used a loan to buy a large piece of equipment. Years later, you’re rolling into the holiday season when that necessary piece of equipment breaks. You’re desperate to get back on your feet before the busy season, so you jump on a short term loan to get the equipment fixed. You’re now making payments on your original equipment loan and now the speedy repair costs, and your cash flow takes a hit—so you secure a business line of credit to cover the monthly expenses. Eventually, you fall behind on all your payments and are stuck with unrealistic payments each month that you can’t meet.

That’s where small business loans can help. There are several ways to consolidate small business debt:

  • Debt Consolidation Loan: Some alternative lenders offer a specific debt consolidation loan with terms and rates ideal for debt consolidation. These loans were built with small businesses in mind, making them quick and affordable—plus, qualifications tend to be more lenient.  
  • Bank Loan: Traditional bank loans usually come with the lowest interest rates and the longest terms, but they’re notoriously difficult for small business owners to secure.  
  • Small Business Administration (SBA) Loan: Loans within the SBA’s 7(a) program can be used for several purposes, including debt consolidation (there are a few restrictions to keep in mind). SBA loans usually have the longest terms and lowest interest rates, making them competitive options—however, they require mountains of paperwork, strict qualifications, and a painfully long application process.

Pros and Cons of Business Debt Consolidation

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While business debt consolidation might sound like your ticket out, it has both good and bad aspects. Below, we’ll cover the top pros and cons for you to consider.

Pros of Debt Consolidation

  • Single payment: Once you’ve bundled all your loans into one, you only have a single creditor to pay. This makes managing your monthly payments easier and more straightforward. Plus, if anything happens, you only have to contact a sole lender (instead of several).
  • Lower interest rates: There’s no guarantee you’ll get a lower interest rate, but it’s a good possibility. Shop around until you find a debt consolidation loan with favorable rates.
  • Longer terms: Debt consolidation allows to stretch your terms, giving you a little bit of financial breathing room.
  • Reduced payments: Longer terms and lower rates generally lead to reduced monthly payments.
  • Credit score boost: Once you’re back to making all your monthly payments (which is hopefully just one), your credit score will start to go in the right direction. When lenders and vendors see you making your payments on time, they’re more likely to lend to you (and with more favorable terms and rates, too).
  • Save time: Staying on top of all your different loans takes time and money. Managing a single loan payment will save you valuable time every month.

Cons of Debt Consolidation

  • Doesn’t attack the problem: Fighting debt with debt isn’t always the sole solution. Your business fell into a negative debt cycle for a reason, and consolidating your debt doesn’t eliminate that deeper problem. Focus on making good business decisions that ultimately drive more revenue and incur fewer expenses.
  • Longer terms: This is both a pro and a con—a con because debt consolidation has long-term consequences. Sure, it gets you out of trouble now, but it’s still a new loan that you might be locked into for years to come.
  • Lower interest rate isn’t guaranteed: While many businesses can lower their interest rate with a debt consolidation loan, there’s no guarantee.
  • Debt consolidation can be more expensive: Extending your terms to afford your debt consolidation loan may make your single loan more costly than your multiple debts in the long run.

How to Use a Debt Consolidation Loan

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If you’ve weighed your options and decided a debt consolidation loan is your business’s best course of action, then it’s time to make it happen. Follow these steps to navigate the process:

1. Identify your expectations for consolidating

It’s easy to get lost in the weeds once you start analyzing terms, rates, payments, and the like. Stay focused. Identify your expectations from the get-go, and then make sure your end choice meets your goals.

Are you looking to lower your interest rate to reduce the loan’s overall price, or do you want lower monthly payments? Do you want to bundle all of your loans or just the most expensive ones?

Keep your goals in mind as you compare your options.

2. Make a list of all your current debts

Create an easy-to-read list of all your existing loans. Include details around the lender, total remaining balance, interest rate, term length, payment date, and payment amount.

Calculate the average APR of your existing loans so you can compare that to the APR of your debt consolidation loan.

While you’re at it, go ahead and tally up your total business debt. You’ll want to use this number when looking at your new consolidation loan to determine if consolidating will be more expensive in the long run.

This list will help you identify which loans you want to consolidate and which ones you might have under control.

3. Check for prepayment penalties

Look at the details of each of your loan agreements. Some lenders impose prepayment penalties for paying off your loan early—and when you consolidate your debts, you’re essentially paying off all your loans to then take a new, bigger loan.

If your loans do have prepayment stipulations, make sure you factor those fees into your overall debt costs.

4. Shop around for a business consolidation loan

Depending on your years in business, credit score, and annual revenue, you may qualify for a few different loan options.

For example, if you have excellent financials and a healthy credit history, you might want to shop around at the bank or with the SBA. However, if you need quick consolidation and lack the requirements, you can find a loan with an online lender.

Talk to your bank and research alternative lenders to see if you qualify for the debt consolidation loans they offer.

5. Compare your options

When shopping around for a loan, consider all the characteristics of each loan. What are the different APRs, terms, and monthly payment estimates? Which of these loans aligns most closely with the goals and expectations you set in step 1?

6. Make the ultimate decision

Once you have a good idea of your business debt consolidation options, it’s time to make the ultimate decision—do you consolidate your debt?

If you decide to consolidate, move on to step 7.

7. Pay off your previous debts

Use your new debt consolidation loan to pay off your existing debts. In some cases, you’ll do this manually by paying your creditors the remaining balance on your loans. In other cases, your new lenders will make the payments for you.

8. Start making payments on your new debt consolidation loan

Stay on top of your single, consolidated loan from the get-go. A debt consolidation loan is a second chance, so do everything in your power to stay on top of your monthly payments and avoid late fees.

Read Also: Understanding the Payment Processing System: A Small Business Owner’s Guide


Debt is a necessary part of running a small business, but sometimes it can get out of hand. Fortunately, a debt consolidation loan can help bail your company out of trouble. Debt consolidation isn’t right for everyone, so make sure you weigh the pros and cons to determine if it’s right for your business. If it is, move forward with confidence to find the debt consolidation loan that best meets your financial goals.

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