The Ultimate Guide to Business Debt Consolidation

What You Need to Know About Business Debt Consolidation Loans

If you have existing debt from business loans and are having trouble managing your payments, you may be looking for a solution to free up cash flow and simplify your finances. In this case, you might be exploring your options for business debt consolidation.

With a business debt consolidation loan, you can pay off several, smaller business loans with the proceeds of this single debt consolidation loan. Business debt consolidation loans help you refinance existing debt and allow you to gather all of your loan payments into a single repayment schedule. Plus, beyond just consolidating your debt payments into one, these loans can typically offer more ideal terms like less frequent payments and lower rates. 

Therefore, if you want to make repaying your business debt more manageable and affordable, you’ll want to explore your best options debt consolidation. To help you through this process, we’ve created this guide. Here, we’ll explain how business debt consolidation loans work, what your top options are, and how to actually go about consolidating your debt—so that you have all the information to decide if business loan consolidation is the right solution for you.

Best Business Debt Consolidation Loan Options

  • Traditional bank loans: Best for highly-qualified borrowers to receive ideal rates and terms
  • SBA loans: Best alternative to bank loans with low-interest rates and long terms
  • Fundation: Best for debt consolidation loans with bi-monthly payment schedule
  • Funding Circle: Best online lender with fast funding, long terms, and no minimum revenue requirement
  • OnDeck: Best for businesses with only one year in business
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How Business Debt Consolidation Loans Work

Before we dive into the best options for business debt consolidation loans, it’s first important to understand how business debt consolidation works.

On the whole, business debt isn’t a bad thing—in fact, taking on debt financing is one of the most common (and best) ways to finance business growth. According to the Small Business Administration, three-quarters of all small business funding comes from debt.

However, sometimes you take on financing that’s expensive—when you need funding quickly, experience an emergency, or for a variety of different scenarios. Although taking on this debt may solve these needs in the moment, your rates might be expensive long term and can be a hindrance to your overall business finances.

It’s in these situations where you’ll likely want to consider business debt consolidation. If you’re struggling with multiple repayment schedules for multiple business loans, obtaining a small business debt consolidation loan can convert those multiple accounts and payments into a single loan product with a predictable interest rate and a single payment schedule to follow.

Business Loan Consolidation vs. Refinancing

Now that we have a basic sense of what business debt consolidation is and why it may be worth considering, let’s take a look at an important distinction.

Sometimes, people use the terms debt consolidation and debt refinancing interchangeably. Although refinancing and debt consolidation are indeed similar, it’s important to establish that they are not the same. 

With debt consolidation, you’re taking all of your existing loans or financing products and combining them into one single loan. When you refinance a business loan, on the other hand, you take out a new loan, at a lower interest rate, with the purpose of paying off a higher-rate loan or loans.

In this way, debt consolidation can be considered a form of refinancing, but not all refinancing is debt consolidation. To explain, if you just replace one loan with a new loan at a lower interest rate, this would be considered refinancing, but not debt consolidation, as debt consolidation converts multiple loans into one loan.

In addition, debt consolidation doesn’t necessarily result in a lower interest rate. Ideally, your business debt consolidation loan will save you money, but the focus of debt consolidation is to make payments more manageable by replacing several lenders with one. As such, you might not necessarily get a better interest rate.

Therefore, and as we’ll discuss, you’ll want to be sure you work with a reputable lender, do your own research, and check your calculations multiple times in order to determine that consolidating your small business debt is the right choice for your business.

Top 5 Business Debt Consolidation Loan Options

With all of this in mind, let’s explore your best options for business debt consolidation loans.

Ultimately, as you compare your options, you’ll want to look for long-term loans, so that you can consolidate your debt and pay it off in smaller amounts over a longer period of time than your current funding offers.

Other than this overarching qualification, your consolidation business loan options will largely depend on your specific situation. As with most business financing products, factors like your credit score, your business’s revenues, and the age of your business will all impact the business consolidation loans that are available to you.

This being said, however, here are five top options to consider:

1. Traditional Bank Loans

Without a doubt, a bank loan is one of your best ways to consolidate business debt—if you can qualify. Overall, bank loans have the lowest interest rates and longest terms, and these lenders also lend to issue large amounts of capital.

This being said, however, it’s often difficult for small business owners to qualify for bank loans in general, let alone for the purpose of debt consolidation. Therefore, if you’re looking for a business debt consolidation loan from a bank, you’ll likely have to be a highly qualified borrower, with multiple years in business, a strong credit score, and substantial revenue.

If you can access a business consolidation loan from a bank though, you can expect the following:

  • Term length: Typically around 10 years
  • Interest rates: Usually under 10%
  • Payment frequency: Monthly

You may find local community banks or national banks can assist you with consolidating your business debt. You will likely need to work directly with the bank, either over the phone or in-person to discuss your options. Chase, for example, states on their website that their business term loans can be used for debt consolidation, with fixed and adjustable rates, flexible terms from 12 to 84 months, and fixed monthly payments. You will, however, need to visit a branch to actually apply for any Chase business loans.

2. SBA Loans

If you can’t qualify for a traditional bank loan, SBA loan is one of the next best options for consolidating business debt.

Although the SBA has various loan programs, you’ll want to look to the SBA 7(a) program for a debt consolidation loan.

Loans within this program can be used for a variety of purposes, including business debt consolidations, although the SBA does implement certain restrictions for using 7(a) loans for debt consolidation.

For example, the purpose of the original loans must be eligible under the SBA 7(a) guidelines, the proposed loan must have a payment amount at least 10% less than the existing loan(s), and you must include a written explanation for each loan as to why the current loan does not have reasonable terms.

With this in mind, you would work with an SBA lender, like a bank, to apply and receive a 7(a) for your business debt consolidation. With these SBA loans, you can expect:

  • Term length: 10 to 25 years
  • Interest rates: 7% to 9.5%
  • Payment frequency: Monthly

Like bank loans, SBA 7(a) loans are highly desirable because of their long terms and long-interest rates. This being said, however, although more easily accessible than bank loans, SBA loans will still require a lengthy application process and high qualifications.

3. Fundation

For more accessible business debt consolidation loans for those who can’t qualify for bank or SBA loans, you might consider working with an alternative lender like Fundation.

Fundation offers loans up to $500,000 with a quick and easy online application and an average funding time of three business days. Overall, you can expect the following from a term loan from Fundation:

  • Term length: One to four years
  • Interest rates: 8% to 30% APR
  • Payment frequency: Bi-monthly

The bi-monthly payments associated with Fundation’s term loans are particularly noteworthy for those who are looking for a business debt consolidation loan to free up cash flow. Plus, if you can pay off your Fundation loan ahead of your determined schedule, you can save on interest, and face no prepayment penalty fees.

All of this being said, to qualify for a debt consolidation loan from Fundation, you’ll need a minimum annual revenue of $100,000, a minimum personal credit score of 600, and at least two years in business.

Although Fundation doesn’t offer interest rates as low (nor terms as long) as bank or SBA loans, their term loans are significantly more affordable than many short-term business loans from online lenders—making Fundation a great option for debt consolidation if you can’t qualify for bank-based financing.

4. Funding Circle

Another online lender on our list of the best small business consolidation loans, Funding Circle provides business loans of up to $500,000 with the following terms:

  • Term length: Six months to five years
  • Interest rates: 4.99% to 22.99%
  • Payment frequency: Monthly

Like Fundation, Funding Circle offers an affordable business debt consolidation loan option with speed and a simple application that you won’t find with banks or SBA loans. Generally, you can complete your initial application for Funding Circle online in just 10 minutes—and on average, Funding Circle funds loans in three business days after you’ve submitted a complete application with all documents.

To qualify for a term loan from Funding Circle, you’ll need at least two years in business and a minimum credit score of 620. Funding Circle does not dictate a minimum for annual revenue.

With all of this in mind, Funding Circle offers flexible terms, requirements, and competitive interest rates for small business owners looking to consolidate their debt. Although it may be more difficult to qualify for Funding Circle compared to other products from some alternative lenders, their business consolidation loan will be an affordable option for those who can’t qualify for bank or SBA loans.

5. OnDeck Capital

Although OnDeck offers business consolidation loans with terms shorter than Funding Circle or Fundation, they’re an option worth considering due to their flexible requirements and fast funding times.

With OnDeck, you can access a short-term loan up to $500,000 and can expect:

  • Term length: Three to 36 months
  • Interest rates: 9% to 99% APR
  • Payment frequency: Daily or weekly

Although OnDeck’s payment frequency isn’t as ideal for those looking to free up their cash flow with debt consolidation, OnDeck can fund applications in as little as one day and will work with businesses who have only been in business for a year.

This being said, to qualify for a short-term business debt consolidation loan from OnDeck you’ll need a minimum personal credit score of 600 and a minimum annual revenue of $100,000.

Ultimately, even though you may be able to find longer terms and more affordable rates from other online lenders, OnDeck is a worthwhile alternative if you can’t qualify for other debt consolidation loans.

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How to Consolidation Business Debt in 9 Steps

Now that we’ve reviewed the best options for business debt consolidation loans, you may be wondering: How do I actually go about consolidating my business debt?

Here are nine simple steps you can follow to optimize your business debt consolidation:

Step 1: Identify Current Business Debts

First, you’ll want to take a look at your existing business loans and the details of each, including the outstanding amount, the lender, the interest rate, the maturity date, and the payment schedule.

Step 2: Check for Prepayment Penalties

With this step completed, you’ll next want to remember that with a commercial debt consolidation loan you are taking one larger business loan to pay off several smaller loans. This being said, by paying off the smaller loans before their maturity date, you could trigger prepayment penalties.

Prepayment penalties exist when the lender stands to lose money on interest payments they would’ve collected from you if you hadn’t paid the loan off early. Prepayment penalties can be expensive, so you’ll want to check to see if your existing loans incur this fee before you pay them off to consolidate business debt.

Step 3: Determine Total Business Debt

Now that you have the details of each of your loans and any prepayment penalties, you should know which loans you want to combine into a single large loan. Add up all of this debt.

Step 4: Calculate Average APR

Next, you’ll want to know the average annual percentage rate (APR) of your existing loans, so you know what kind of interest rate you’re looking for with your debt consolidation loan. Along these lines, it’s important to remember that APR is not the same as an interest rate. APR is the annualized interest of a loan, including all fees, and gives you an honest assessment of the cost of the loan.

Step 5: Search for a Business Debt Consolidation Loan

At this point, you’re ready to actually look for the right business debt consolidation loan for you. You can start with the top options on our list and consider which loan product and lender will work best for your business.

Step 6: Compare APRs

Once you’ve shopped your business debt consolidation loan options, you’ll want to compare the APR of your old loans with that of the potential new loan.

Ideally, you’ll be able to get a lower APR with the new loan than you have with your current loans.

Step 7: Decide Whether to Consolidate

Even though it may be great to receive a lower APR on your new debt consolidation loan, there are other factors to consider as well.

For example, the new loan might also have a much longer term, which means you’ll end up paying more in interest over time. Additionally, consolidating your business debt into one loan also means you’ll be paying interest on interest—you’ll be paying compounded interest with your new loan on top of the initial interest you owed.

On the other hand, of course, a debt consolidation loan can conserve cash flow and make repayment simpler.

Ultimately, you’ll need to determine if the new loan makes sense for your business, given your specific finances and priorities.

If you’re having trouble sorting through the different business loan interest rates and terms, you may consult your business accountant or other financial advisors for advice.

Step 8: Pay Off Existing Debts

If you decide that you’ve found a business debt consolidation loan that will work for you (and of course, that you qualify for), you’re ready to sign the agreement and use the capital to pay off your existing debts.

In most cases, you’ll never actually see the money that goes to pay off your existing small business lenders. The new lender will divide up the money among your existing creditors. You now have just one lender, and this lender will start to send you statements.

Step 9: Make Payments on Your Business Debt Consolidation Loan

Now that you have your new consolidated loan, you’ll want to remain on good terms with the lender and avoid fees by making your loan payments on time.

If you follow those steps, you should have no trouble making an educated and informed decision as to whether or not your business will benefit from a business consolidation loan.

Frequently Asked Questions

The Bottom Line

At the end of the day, there are a number of specifics to consider when trying to decide if a business consolidation loan is the right way to pay off your existing debts.

This being said, if you’re still unsure if a debt consolidation loan is best for your business, here are a few points you should keep in mind:

  • If your current loans already have low-interest rates, it’s unlikely that business debt consolidation will benefit your business. In general, the higher the interest rates on your current loans, the more beneficial small business debt consolidation will be.
  • If you have multiple short-term loans that you’d like more time to pay off, you might be able to consolidate your business debt into one multi-year term loan—or at least a loan with longer terms than your current contracts have allowed. Keep in mind, though, that this purpose for debt consolidation can easily create an expensive and dangerous cycle. Make sure that the revenues you’re counting on will be enough to cover the full amount of the new business term loan—including additional interest that will accrue.
  • If you’re looking to consolidate business debt, you’ll likely need solid personal credit. Additionally, you’ll be able to access better, more affordable options if your business and personal financials have improved, as well as if you’ve passed the one-year in business threshold from the time you received your original loans.

With all of this in mind, however, it will ultimately be up to you to determine what’s best for your business. If you do decide a business debt consolidation loan is the way to go, you’ll want to be sure to work carefully with lenders, consider all of your options, and choose the solution that will be most beneficial to your finances in the long run.

Founding Editor and VP at Fundera at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. 

Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.

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