Is a Business Debt Consolidation Loan Right For You?
Unlocking the secret to solid financial footing
There’s no question that everything is getting more expensive these days, including the cost of running a business. According to research from Credisafe, 74% of companies reported an increase in operating expenses in the previous year, and only 26% reported a decrease in their debt during that period.
With most companies facing rising debt and skyrocketing costs, business debt consolidation loans can provide some much-needed breathing room and are an increasingly appealing option for regaining budget control.
What is a business debt consolidation loan?
A business debt consolidation loan allows you to pay off (or reduce) other debts. Instead of making payments to multiple accounts, these loans have a single, fixed interest rate, allowing you to make a single monthly payment.
Consolidating your debt is one way to keep your business expenses in check in the face of rising interest rates. Since 2020, the cost of borrowing has increased by nearly 5%, meaning you’re likely paying more interest on your existing debts—and it’s taking longer to pay down the principal. This could be causing cash flow issues for your company.
Rolling your business debt into a single loan with a lower interest rate could help ease the cash crunch and some of the stress of keeping your business finances on track. However, before you take this route, there are a few things you need to consider to ensure you get the right loan and don’t inadvertently dig a much deeper financial hole.
When to consider a business debt consolidation loan
In some circumstances, a business debt consolidation loan will positively impact your business finances. In general, it’s worth exploring this option when:
The loan offers a competitive interest rate
When you’re paying on multiple debts, including other loans, lines of credit, and credit cards, the interest rates will vary, and depending on the lender and the type of debt, those rates can be significantly higher than what you’ll pay on a consolidation loan. For example, the average business credit card interest rate ranges from 18% to 36%, while bank business debt consolidation loan rates range from 6.43% to 12.45%. Consolidating high-interest debt into a lower-rate loan can mean significant savings.
You’re struggling to stay on budget
Fluctuating interest rates can challenge business budgeting, especially when you need to make monthly payments on multiple accounts. A single loan payment makes planning for monthly expenses and making on-time payments more manageable.
You can’t pay all your bills
If you’re making late payments or putting off payments due to cash-flow issues, consolidating your debt can help get you back on track. With the right loan, it’s possible to pay off existing debt and reduce your overall monthly burden, giving your company some financial breathing room.
Types of business debt consolidation loans
While some lenders offer loans explicitly marketed for debt consolidation, you can also take a term business loan that can be used for any business-related purposes. There’s little difference between them in terms of borrowing amounts, qualification criteria, and repayment terms; the big difference is that a debt consolidation loan can only be used for that purpose.
That said, you have options for business debt consolidation.
Traditional bank loans
A bank loan might offer attractive terms and interest rates, but it can be challenging to qualify for one. Most banks only work with well-established companies with excellent credit and positive cash flow.
SBA
An SBA 7(a) loan can be used for debt consolidation. These loans typically have competitive rates but, like bank loans, require excellent credit and extensive paperwork.
Private lender
A private lender might be a viable option if you don’t qualify for a bank or SBA loan. While many lenders are more flexible when qualifying for a loan, the rates and terms can vary wildly between lenders.
Line of credit
A business line of credit allows you to withdraw cash as you need it to cover business expenses. While this might be a viable short-term solution in a pinch, borrowing against a line of credit will likely cost more than you already pay, thanks to high interest rates and fees.
Balance transfer credit cards
Although not technically a loan, opening a lower-interest credit card and transferring the balance of a more expensive card can help reduce your expenses.
Pros and cons of loans for business debt consolidation
There’s no question that, in many cases, a business debt consolidation loan can give your company some financial breathing room and help you get on more secure financial footing. It’s not a cure-all for every financial issue, but when expenses seem to increase daily, it’s worth exploring every option to improve cash flow.
Pros of a business debt consolidation loan:
You’ll pay off debt faster
Not only can you pay multiple smaller balances and get them off your books, but the lower interest rate and the shorter repayment period of a loan (especially compared to a credit card) help your company get out of debt sooner. Lower interest rates also mean that more of your payment goes toward reducing the principal, getting it closer to zero every month.
Easier budgeting
When making a budget, it’s much easier to include a single fixed payment than multiple payments that can vary monthly.
More financing opportunities
Consolidating your debt can create opportunities for more competitive financing in the future. Paying off your debt reduces your credit utilization, which helps increase your credit score. A higher score can mean more competitive financing options when you need them.
Increased cash flow
In many cases, the payment for a business loan will be less than the multiple debt payments you’re making. This can increase available cash for other purposes.
Avoid default
If your business is at risk of defaulting on one or more debts, a consolidation loan can prevent that from happening and make your payments more manageable.
Cons to borrowing money for debt consolidation
Getting a loan isn’t always easy
Sometimes, the very reasons you need a debt consolidation loan can make it harder to access one. Lenders may be reluctant to extend additional funding if your business is in trouble, your credit score is lower than average, or your debt is substantial.
Potentially increased total costs
Although your monthly payments could be lower, a debt consolidation loan might cost more in the long term. The longer repayment terms often mean paying more over the life of the loan.
More debt
Although a loan can help you regain control over your finances and provide some immediate relief, without a clear plan for managing your company’s debt, it could worsen your financial situation. It won’t address issues related to cash flow or revenue; if you continue the same spending patterns, you’ll just continue to incur debt.
Credit score impacts
Any time you take on any type of debt, it will impact your credit score, including a debt consolidation loan. Just applying for a loan creates a hard inquiry on your report, which takes off a few points. However, as long as you make your payments on time, the effect will be temporary, and your score could even go up.
Not all debts qualify for consolidation
Lenders restrict the kinds of debt you can consolidate with these loans. Most commercial debt qualifies (such as business credit cards and lines of credit), but you can’t include personal debt, such as mortgages or student loans.
Other options for managing business debt
A business debt consolidation loan can be helpful in getting a better handle on company finances and reducing overall expenses. However, you have other options if you don’t qualify for a loan or the interest rate and payments don’t fit your budget.
One option is to modify an existing loan. Restructuring means working with the lender to renegotiate the loan terms, such as extending the repayment period or reducing the interest rate, to make payments more manageable. Refinancing means taking out a new loan to repay an existing one.
Regardless of how you approach your company’s debt management, if you’re in danger of defaulting or in over your head, you must take steps to improve your financial position. It might mean making difficult but necessary choices to reduce expenses (like reducing staff or services) or coming up with creative ideas to increase revenue.
Explore debt consolidation options with Finance Factory
If you think a debt consolidation loan will help better manage your company’s debt and support growth, Finance Factory is here to help. Our experienced advisors connect qualified businesses with competitive funding options from trusted lenders, making the process as simple, streamlined, and affordable as possible.
Start the process today by completing our simple pre-qualification form. There’s no obligation and no impact on your credit. We’ll help you explore financing options and walk you through the loan application process so you can keep your company on secure footing and thrive in a challenging business climate.
