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Consolidating Small Business Debt: A Complete Guide

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It’s nearly impossible to run a small business without incurring debt. In a perfect world, you’d be able to fund all of your expenses yourself and still have profits in your bank account. For small business owners, this often isn’t the case. Loans, credit cards, and other financial products are used to pay everything from day-to-day operating expenses to major business expansions.

Even if you researched your options before taking on debt, over time, situations change and your debt burden may begin to overwhelm you. What worked for your business a year ago has now become untenable. This payment is due next week, that payment needs to be made next month … you get the idea.

If this sounds familiar to you, there’s a solution that could simplify your debt payments while potentially yielding lower payments and better terms. That solution? Small business debt consolidation. Read on to learn more about small business debt consolidation, the benefits of consolidating debt, and finding the best lender for your financial situation.

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What Is A Business Debt Consolidation Loan?

Business debt consolidation and refinancing are two terms that are mistakenly used interchangeably. Before we dig into the specifics of business debt consolidation loans, let’s take a look at what this term really means and how it differs from debt refinancing.

A business debt consolidation loan combines multiple debt payments into just one loan. Instead of paying many different lenders on different days and pay schedules, you’ll make your payments to just one lender.

Let’s say that you make a loan payment at the beginning of each month, as well as a weekly line of credit payment, and a monthly credit card bill at the end of the month. Through business debt consolidation, these debts could be combined so that you make one monthly payment to a single lender.

With debt consolidation, you may be able to obtain a lower interest rate, which reduces your payments and the total cost of borrowing. For example, you may have taken out several loans one year ago with high interest rates due to a low credit score, short time in business, or other challenges. Now, your situation has improved and you qualify for better rates and terms, so you could receive a debt consolidation loan with a much lower interest rate.

In this example, the debt consolidation loan at a lower rate is also a type of refinancing. However, this isn’t always the case. If you don’t qualify for lower interest rates, your total payments will remain the same. The debt consolidation loan wouldn’t save you money but would combine your loans into one easy, more manageable payment.

If you’re refinancing your debt, you’re not necessarily consolidating it. While this is an option, refinancing is simply receiving another loan at a lower interest rate to save money. You’ll still work with multiple lenders, but you’ll receive benefits including reduced interest rates, lower fees, and longer repayment terms.

Here’s an example: a business owner took out a loan of $20K, with a two-year term length and an interest rate of 36%; repayments are $1,180 a month. A few months later, after the business has matured, the merchant decides to refinance. This time, they secure a $30K loan with a four-year term length and an interest rate of 12%. Repayments are down to $790 per month, and they’ve attained an extra $10K of working capital.

Why Consolidate Business Debt?

If you want to take control of your business debt, consolidation may be an option to explore. So, why should you consolidate business debt? There are a number of reasons this could be beneficial for your business.

Improved Repayment Terms

If you have a debt payment schedule that’s all over the place, you can improve your repayment terms with a business debt consolidation loan. Instead of a combination of daily, weekly, and monthly payments, you’ll pay just one lender on a regularly scheduled basis.

You can also potentially receive longer repayment terms. Let’s say that one of your debts is a loan with 12-month terms. You receive a consolidation loan that will cover this short-term loan, as well as other loans and credit card debt. The repayment term for your consolidation loan is set at four years, giving you more time to pay off your short-term loan and other debts.

Reduced Rates & Fees

A debt consolidation loan can actually help you save money by lowering your rates and fees. Maybe your credit situation has changed since you received high-interest loans. Perhaps you faced an emergency that required fast cash, so you had to settle for financing with lots of fees. No matter what the situation, it’s completely possible to receive a loan with a lower interest rate and reduced fees, thus lowering your payments and the overall cost of borrowing. Consolidating to reduce your rates and fees is especially helpful if you’re buried in debt after stacking multiple loans.

Improved Cash Flow

If you can score a consolidation loan that lowers your payments and cost of borrowing, you can improve the cash flow of your business. You can invest this extra money back into your business, or you can even use extra funds to pay off your debt more quickly.

Types Of Loans For Business Debt Consolidation

Whether you’re struggling to pay your debt and want to receive better rates and terms or you’d rather organize multiple payments into one, there’s a business debt consolidation loan available for you.

Bank Loans

If you have a solid credit history, time in business, and revenues, you can turn to a bank for a consolidation loan. However, you should be aware that qualifying for bank loans is difficult. If you do qualify, you’ll receive low interest rates and long repayment terms. To qualify for bank loans, you should have a credit score of at least 700, steady revenue, and a time in business of at least 2 years.

SBA Loans

The Small Business Administration is a great resource for affordable, long-term business loans. SBA 7(a) loans can be used for any business purpose, including refinancing or consolidating debt. If you don’t qualify for a bank loan, this is the next best option. It’s easier to qualify for SBA loans than traditional loans since they are guaranteed by the government and there’s less risk for the lender.

SBA 7(a) loans are available for up to $5 million. Repayment terms are between 7 and 25 years. Interest rates are low and are based on guidelines set by the SBA. To qualify, you must have a credit score in the high 600s, solid revenues, and a time in business of at least 2 years.

Online Installment Loans

If you don’t qualify for traditional or SBA loans, a consolidation loan could be available with the click of a mouse. Online lenders have made it easier than ever for business owners to receive the money they need.

When other lending options don’t work out, an online installment loan or another alternative loan can be used to consolidate your business debt. Borrowing limits, rates, fees, and repayment terms vary by lender, but the best rates and terms are reserved for borrowers with good credit scores, a longer time in business, and high revenues.

How To Get A Business Debt Consolidation Loan

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You’ve made the decision to take control of your business debt with a consolidation loan, but you don’t know where to start. While the steps you take depend on the lender you select and your specific financial situation, there are a few key points to remember before you sign your loan contract.

Before you even fill out an application, it’s important to know where you stand in terms of credit. Pull your free credit score before you apply for a loan. To qualify for the best options with the lowest rates, your personal score should be at least in the high 600s. For some loans, your business credit score is also a qualifying factor.

To qualify for SBA loans and bank loans, your credit report should be free of foreclosures, bankruptcies, liens, recent collections, and past defaults. Review your report, and dispute any errors. If you do have credit challenges that prevent you from qualifying for lower rates and better terms, consider taking the time to raise your credit score before applying for a consolidation loan.

Before you apply, you need to know how much money you need to borrow. Add up your total debts to calculate the amount you need. Understand your current payment terms. This way, you can pursue only the loan options that offer better repayment terms than what you currently have. Make sure to also consider any prepayment penalties that may apply when you pay off your old loans early.

When shopping for a consolidation loan, you also need to take into consideration fees that you may have to pay from your new loan, such as origination fees. Even though these are typically deducted from your loan and won’t have to be paid out-of-pocket, excessively high fees could cut down on the amount you’re saving by consolidating your debt.

After you review your credit and make your calculations, you’re one step closer to applying for a consolidation loan, but you can do some work ahead of time by gathering your information and documentation. Before you apply, gather the following documentation:

  • Business & Personal Credit Scores/Reports
  • Business & Personal Income Tax Returns
  • Profit & Loss Statements
  • Balance Sheets
  • Business & Personal Bank Statements
  • Personal & Business Information: Social Security Number, federal tax ID number, legal name, business name, contact information
  • Business Debt Schedule
  • Account Numbers & Balances For Consolidation

Based on the lender’s requirements, additional documentation and information may be required before applying and throughout the lending process. Always make yourself available to your lender to provide what’s needed so you can move forward with your consolidation loan.

Once you’ve done all of the prep work, it’s time to apply for your loan. The next step is selecting a lender that offers the best rates and terms for your business.

The Best Lenders For Business Debt Consolidation

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Now that you’re ready to apply for a consolidation loan, it’s time to select your lender. There are many loan options open to you, but if you’re unsure of where to begin, start by taking a look at these online lenders.

SmartBiz

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SmartBiz is a lender that works with banks to disperse SBA 7(a) loans. Instead of waiting months to receive your loan, SmartBiz can prequalify you quickly and help you navigate the process.

SmartBiz has debt consolidation and refinancing loans in amounts from $30,000 to $350,000. Interest rates are between 8% and 9% with repayment terms of 10 years. To qualify, you must be in business for at least 2 years, have a credit score of at least 640, and enough cash flow to make your monthly loan payments. If you have outstanding tax liens, past defaults on government loans, or bankruptcies or foreclosures within the last 3 years, you are not eligible to receive a loan.

Fundation

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Fundation provides business loans from $20,000 to $500,000. These loans can be used for any purpose, including refinancing or consolidating debt. Loan terms of 1 to 4 years are available. APR is between 8% and 30% based on creditworthiness.

To qualify for a Fundation loan, you must be in business for at least 2 years. You should have a minimum personal credit score of 600 and annual revenue of at least $100,000. Fundation can give same-day approval but most loans are approved within 3 to 5 days.

Lendio

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Lendio isn’t a traditional lender but instead acts as a matchmaker to connect you with a lender that best fits your financial needs.

With Lendio, you can apply for SBA loans from $50,000 to $5 million for terms of 10 to 25 years. Lendio can match you with lenders that offer 7(a) loans as well as Express loans up to $350,000.

Lendio also matches you with lenders that offer term loans from $5,000 to $2 million. Term lengths are from 1 to 5 years with rates as low as 6%. Credit, revenue, and time in business requirements vary by lender, but the more solid your business history, the better rates and terms you’ll receive.

OnDeck

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OnDeck gives term loans up to $500,000 to qualified borrowers. You can apply to receive long-term loan options from 15 to 36 months. OnDeck’s long-term loans have Annual Interest Rates as low as 9.99%. An origination fee of 2.5% to 4% of the loan amount is added to your loan, but second and subsequent loans have reduced fees.

To qualify for an OnDeck loan, you must be in business for at least 12 months. A minimum annual revenue of $100,000 and a personal credit score of at least 600 is needed to qualify. Your rates and total loan amount will be based on an assessment of the health of your business as well as your personal and business credit profiles.

StreetShares

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With StreetShares, you can receive between $2,000 and $250,000 with repayment terms of 3 to 36 months. Interest rates are between 6% and 14% and APRs are between 7% to 39.99%. Your maximum loan amount will be up to 20% of your annual revenue.

To qualify, you must have been in business for at least 1 year. You should have at least $25,000 in annual revenue and a score of at least 620 for the best odds for approval. You may still qualify for a loan if you’ve been in business for 6 months if you have at least $100,000 in revenue.

LoanBuilder

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You can receive between $5,000 and $500,000 when you apply for a LoanBuilder loan. Repayment terms are between 13 and 52 weeks based on the amount borrowed. A fixed fee of 2.9% to 18.72% of the borrowed amount is added to the cost of your loan. No additional fees or interest are charged.

To qualify for a LoanBuilder loan, you must have at least $42,000 in annual revenue and a time in business of at least 9 months. You must have a personal credit score of at least 550 with no active bankruptcies on your credit report. Your maximum borrowing amount and fee are based on the performance of your business and your personal credit history.

Final Thoughts

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Consolidating your debt can be a smart move for your business. Not only will you be able to make payments to just one lender on a set schedule, but you can potentially lower your interest rate, lengthen your terms, and reduce fees.

Before you jump into a new loan, make sure that you’ve crunched the numbers, evaluated your credit, and have found a reputable lender that can help you simplify your debt payments. Once you do, continue to be a responsible borrower by paying down your debt as quickly as possible to free up cash flow, boost your credit score, and help you qualify for even better financing options in the future.

Erica Seppala

Erica Seppala

Erica is a writer based in Greenville, South Carolina. She is a graduate of Limestone College. Initially determined to be an accountant, she put away the calculator and picked up a laptop to pursue her dream of being a writer. Erica has spent the past 10 years writing blogs and articles for hundreds of private clients, and she loves sharing her love of research and the written word with everyone around her.
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