The Ultimate Guide to Business Debt Consolidation

A business debt consolidation loan can help you streamline your business loan payments and, ideally, secure better rates in the process. In other words, they’re a great solution for freeing up cash flow and simplifying finances.

Consider a debt consolidation loan if you have multiple loans and could benefit from a single loan with one repayment schedule with less-frequent payments. But it can be easy to get into an expensive and repetitive cycle. So make sure you have enough revenue coming in to cover the full amount of the new loan before you decide that this is the right solution for your business.

If your business could benefit from a debt consolidation loan, evaluate your options carefully. Look for long-term loans that allow you to consolidate your debt and pay it off in smaller amounts over a longer period of time than your current funding allows. Factors like your credit score, your business’s revenues, and the age of your business will also impact the business consolidation loans that are available to you.

Best Business Debt Consolidation Loan Options

• Traditional bank loans: Best for highly-qualified borrowers to receive ideal rates and terms
• SBA 7 (a) loans: Best alternative to bank loans with low-interest rates and long terms
• 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

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.

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.

Here are four top options to consider:

A bank loan is one of the 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 tend to issue large amounts of capital.

But it can be difficult to qualify for a bank loan, especially for the purpose of debt consolidation. You need to be a highly qualified borrower with multiple years in business, a strong credit score, and substantial revenue to qualify.

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

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

Chase, for example, allows business term loans to be used for debt consolidation. Chase business loans offer fixed and adjustable rates, flexible terms from 12 to 84 months, and fixed monthly payments. You can contact Chase to discuss your options but can only apply for a business loan in person at a branch.

Community and regional banks can also help you consolidate your business debt.

If you don’t qualify for a traditional bank loan, an SBA 7(a) loan is one of the next best options for consolidating business debt.

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

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

You can work with an SBA lender, like a bank, to apply for a 7(a) loan for business debt consolidation. With these SBA loans, you can expect:

• Term length: 10 to 25 years
• Interest rates: 5.5% to 9.25%
• Payment frequency: Monthly

Like bank loans, SBA 7(a) loans are highly desirable because of their long terms and low interest rates. While SBA loans are more easily accessible than bank loans, they do require a lengthy application process and high qualifications.

Funding Circle offers flexible terms, requirements, and competitive interest rates for small business owners looking to consolidate their debt. The online lender provides business loans of up to $500,000 with the following terms:

• Term length: Three months to 10 years
• Interest rates: 4.99% to 18.99%
• Payment frequency: Monthly

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. You can typically complete your initial application for Funding Circle online in just 10 minutes and loans are funded in an average of three business days after you’ve submitted a complete application with all documents.

You need at least two years in business and a minimum credit score of 660 to qualify for a term loan from Funding Circle. The online lender does not dictate a minimum for annual revenue.

Although OnDeck offers business consolidation loans with terms shorter than Funding Circle, 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 $250,000 and can expect:

• Term length: Up to 24 months
• Interest rates: APRs starting at 29.9% (based on loans originated in the half-year ending March 31, 2022)
• 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.

To qualify for a short-term business debt consolidation loan from OnDeck, you’ll need a minimum personal credit score of 625 and a minimum annual revenue of $100,000.

Although you may 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.

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 six simple steps you can follow to optimize your business debt consolidation:

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.

Using a debt consolidation loan to pay off smaller loans before their maturity date could trigger prepayment penalties.

Prepayment penalties can be expensive, so find out whether you’ll incur this fee on any loans before you pay them off to consolidate business debt.

Add up all of the loans you plan to consolidate, plus any prepayment penalties, to understand how much you’ll need to borrow for your business debt consolidation loan.

You also 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. 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.

At this point, you’re ready to 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.

Compare the APR of your old loans with that of the potential new loan.Ideally, your new loan will have  a lower APR than  the loans you are consolidating.

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

While you may  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, a debt consolidation loan can conserve cash flow and make repayment simpler.

Consult your business accountant or other financial advisors if you need help sorting through the different business loan interest rates and terms.

This step is typically pretty hands off. After you apply for and are approved for a  business debt consolidation loan, your new lender will divide up the money among your existing creditors. Future payments will be made to your new lender.

There are a number of specifics to consider before deciding if a business consolidation loan is the right way to pay off your existing debts.

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.