How to Consolidate Business Debt

Debt is a major problem for small business owners. According to a survey from Business.org, 89% of business owners have taken on personal debt to keep their business afloat.

The burden of managing debt not only limits some business owner’s opportunities for growth, it also impacts their mental state.

If you’re in this position, a debt consolidation loan is one solution to consider. Viridiana Ponce, business consultant and founder of VP Consulting, says a consolidation loan can make debt easier to manage and free up your cash flow. “Debt consolidation has brought my clients so much peace of mind!” she says.

There is help for small businesses with debt. Here’s what you should know before consolidating your business debt.

How Does Business Debt Consolidation Work?

Business debt consolidation involves taking on a new business loan to pay off multiple debts owed by your business. When you use the new loan to pay off old debts, you “consolidate” all of them into one loan account.

Why should your business consider debt consolidation? The benefits of taking out a debt consolidation loan for your business can include reducing your interest rates, reducing your monthly debt payments, and reducing the number of accounts/monthly payments you have to manage.

Steps to Consolidate Business Debt

Consolidating business debt is not a quick process. “Give yourself time to research, evaluate, and set up meetings with different lenders,” Ponce said.

If you rush, you might find your business in a worse position than when you started. “My experience has been that quick money usually comes with a higher interest rate,” Ponce warns.

Here’s what you can do about the process to avoid pitfalls:

1. Calculate the Debt

Before choosing a new loan, you’ll have to calculate how much debt you need to consolidate. You can use a debt consolidation calculator to help you out. Ponce recommends reviewing the following records to make sure you don’t miss anything:

• Accounting systems: Find your payment amounts due on loans, credit cards and lines of credit (you can create a spreadsheet if you don’t have a system in place yet).
• Balance sheet: Pinpoint your current debt balances.
• Profit and Loss statement: Determine how much you’ve paid in interest.
• Cash Flow: Confirm how much money comes out of your bank account to pay down debt balances each month.

2. Check Your Credit Reports

Can you consolidate business debt with bad credit? It’s possible, but the better your credit, the better your chances of qualifying for an affordable loan.

Both your business credit AND personal credit can determine which business debt consolidation loans you qualify for, so before applying, you’ll want to review all of your relevant credit reports and see if there’s anything that needs to be addressed.

Personal credit reports: For sole proprietors and Single-Member LLC’s, expect the lender to review your personal credit. You can obtain all three of your personal credit reports — from Experian, Equifax, and TransUnion— for free, once a week from AnnualCreditReport.com. Be sure to check them for errors that could damage your credit and look for opportunities to increase your credit score.

Business credit reports: It can be a little more difficult to access your business credit. If your company has a federal tax identification number/EIN, it may also have business credit reports available. You can pay for reports through Experian, or sign up for Dun & Bradstreet’s Credit Insights to get certain business summaries and alerts for free.

3. Compare Lenders

“Take the time to select the right lender for you,” Ponce advises. “It’s not just about finding the funds, it’s about finding the funds from the right lender and finding a loan that will work for you.”

When comparing lenders, don’t just consider rates, but pay attention to communication, too. Ponce suggests looking for a lender who clearly answers all your questions. If you can’t find the following details, she says that’s a big red flag:

• Loan APR and how rates are calculated (be sure to avoid daily interest rates).
• Application fee, prepayment penalty or any other fees associated with the loan.
• Requirements to qualify.
• Verification of a current lender’s license.

If you’re looking for a loan between $5,000 and $250,000, Ponce recommends reaching out to a Community Development Financial Institutions (CDFI) instead of just going to a bank. “In my experience, CDFIs are amazing lending partners, willing to invest in startups and smaller businesses and they often provide technical assistance to borrowers as a feature of the loan.”

4. Gather Documents

In order to approve you for a loan, the lender will need to thoroughly investigate your business finances. You can save time by gathering the following documents before you talk to a lender:

• Business plan
• Business financial statements for fiscal year and year-to-date
• 2-3 years of business tax returns
• 6 months of bank statements
• 6 months of statements for your loans, credit cards and lines of credit

5. Apply for the Business Debt Consolidation Loan

Once you’ve narrowed down lenders and chosen the loan with the best terms for you, you’ll need to formally apply for a debt consolidation loan. This may be a lengthy process that requires you to fill out extensive paperwork, and you may have to provide additional financial documents upon the underwriter’s request.

If you’re approved, there’s a chance you won’t receive the funds right away. Depending on the lender, it could take anywhere from a few days to one month or more. In the meantime, make sure to make any payments that come due on your old debt accounts.

6. Pay Off Old Loans

The final step in consolidating is to use your new loan to pay off old debt.

With consolidation loans, the new lender may send the funds directly to your creditors to pay off the debt for you. Before applying, you can ask whether or not this is an option. If it is an option, be prepared to provide the lender with information about your debt accounts, such as your account numbers, once your loan is approved.

If it’s not an option, use the new loan to pay off your old accounts once you receive the funds.

Pros and Cons of Consolidating Business Debt

As you may have gathered by now, consolidating business debt isn’t easy… at least not if you do it the right way. But when done carefully, taking out a debt consolidation loan can be a great relief for your business.

Pros

• Potentially reduce your interest rates and pay off debt faster.
• Possible reduction in your monthly debt payments, which can free up cash flow for investment in business growth.
• Reduce the number of accounts/payments you have to manage.
• Relieve debt-related stress.

Cons

• Preparing for loan applications can be time-consuming.
• You likely need good business credit or personal credit to qualify.
• There’s no guarantee you’ll qualify for better terms than you have currently.
• The lender may charge fees.

Alternatives to Business Debt Consolidation

Debt consolidation is one way to manage debt, but it’s not the only way. Here are some alternatives to consider before seeking a debt consolidation loan:

Refinance the Debt

If you’re looking for relief on one specific loan rather than multiple debts, you may consider refinancing. When you refinance, you take out a new loan to pay off a pre-existing debt. In doing so, you may get better interest rates or a more affordable monthly payment.

Restructure the Debt

If one or more of your debts is causing you a financial burden, consider contacting the creditor for help. Depending on the creditor’s policies, they may offer relief through loan modification, deferred payments, or another change to the terms of your debt.

Just beware that you may continue to accrue interest charges, even if your lender approves you for a payment pause.

Financial Help for Small Businesses

Just like with personal finances, there’s financial help for small businesses and for business owners who are struggling.

“If you need support with business debt or with the consolidation process, a business consultant and finance expert can help you with loan preparation and/or with identifying different solutions,” Ponce said.

For free or low-cost guidance, you can reach out to certified, nonprofit credit counselor for tips on how to improve your credit before applying for loans, or for other guidance on how to manage debt.