Small Business Consolidation Loans – Everything You Need To Know

2022-02-10

Minyang Jiang

 

Table of Contents

 

If your small business is juggling multiple loans from various sources and with various payment dates, you may have considered a business consolidation loan to simplify your loan repayment.

Small business debt consolidation loans not only allow you to reduce the number of payments you have to make each month but will ideally allow you to spread your payments over a longer period and at a lower rate.

That makes business debt consolidation a great means of freeing up cash flow while simultaneously making your life — and your bookkeeping — easier.

It’s a move that many small business owners choose to take.  According to a recent study, small business consolidation loans are the most applied-for form of business financing, with 38% of businesses having applied for one.

 

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All You Need To Know About Small Business Loan Consolidation

There are a few things you should understand about business loan consolidation before deciding whether it’s the right choice for your business. 

How Does Small Business Debt Consolidation Work?

Basically, corporate debt consolidation allows you to take out a new loan to repay the balance on each existing loan you’ve taken out for your business. 

You can consolidate any type of loan, including bank loans, a loan advance, or line of credit from online lenders, and so on. Business credit card debt consolidation is also possible. To get the most benefit from your business debt consolidation loan, it’s important to make sure that it covers the entirety of your debt.

Small Business Debt Consolidation

Business debt consolidation loans may take different forms and you can obtain one from either private lenders or traditional financial institutions.

Once you’ve decided on and secured the small business debt consolidation loan that’s best for you, you’ll be free to forget about whatever complicated, costly repayment or remittance plan you were tackling previously and focus instead on one simple monthly payment.

Is a Business Consolidation Loan Debt The Same As Loan Financing?

While similar in their aims, business consolidation loans differ from financing in that they’re about consolidating business debt from various sources, while financing is about seeking better repayment terms for one particular existing loan

It is possible to refinance a business consolidation loan, which is an option that you may want to consider if your consolidated loan fails to solve your cash flow issues.

That brings us to one of the major cons of business consolidation loans: there’s no guarantee that the interest rate of your consolidated loan will be better than those of the loans it’s consolidating, which is why it’s important to choose a lender that offers more attractive rates and terms. 

Before Getting Started

Whichever type of loan you choose, there are certain things you’ll have to do to prepare, including:

  • Determine whether you’ll face any prepayment penalties, which can affect the amount that you have to pay your lenders. 
  • Establish your average APR or total cost of capital (annual percentage rate) so you know how much interest you’re currently paying for and the rate you should be aiming for with your small business debt consolidation loan. If you’re already paying low-interest rates for your existing loans, business debt consolidation may not be a useful option for you.

You’ll also need to ask yourself whether your credit score is high enough and whether you’ve been in business long enough to qualify.

How To Choose a Consolidation Business Loan

As noted above, the most crucial thing to look for when choosing a business debt consolidation loan is the interest rate. Otherwise, you may ultimately end up paying more in the long term.

The route you choose will depend on a number of factors, including the size of your loans, the interest rates or terms you’re after, and your company’s financial standing and credit score. Depending on these factors, you’ll want to choose one of the following three financing options for consolidating your debt

The Best Loans For Commercial Debt Consolidation

1. SBA 7(a) Loans 

Small Business Administration-guaranteed loans are a great option for small business owners whose credit scores or business finances preclude them from qualifying for a traditional bank loan. The 7(a) loan program provides government-backed loans for small businesses with high approval rates and low interest and they’re guaranteed up to 80 percent by the SBA.

The repayment terms for SBA 7(a) loans typically range from two to five years, and at Credibly, have fixed interest rates as low as 6.99%. The best part is SBA loan programs can offer small and large funding amounts – allowing you to tailor debt to your needs.

The qualifying criteria for SBA 7(a) loans include:

  • The loans you’re looking to consolidate must be SBA loan-eligible
  • A personal credit score of 620+
  • 2+ years in business 
  • At least $100,000 in annual revenue
  • No foreclosures or bankruptcies for the last three 

Small business debt consolidation is only one of the many uses for SBA 7(a) loans. You can also use them to supply working capital, purchase equipment, or for commercial real estate. 

Learn more about Credibly’s SBA 7(a) loans.

2. Bank Loans 

For companies that wish to go a more traditional route, banks (including credit unions) remain one of the most common sources of business debt consolidation loans. 

Bank loans offer long repayment terms — up to ten years — as well as relatively low-interest rates (typically, <10%) and fixed monthly terms, making them a solid option for any SME with a stable source of revenue.

Small Business Debt Consolidation

The downside of any bank loan, of course, is that it may not be attainable for businesses with lower credit scores, newer businesses, or those with lower annual revenue. 

The application process can also take longer than other financing options, so it might not be ideal for business owners who want to consolidate, fast

3. Peer-to-Peer Lending  

Funding circles (or peer-to-peer lending) are another attainable option for business owners who can’t—or don’t want to—qualify for a traditional bank loan.

Funding circles work by paying off businesses’ loans with funds that have been supplied by the circle’s investors. The businesses then repay their consolidated loan monthly interest, which goes back to the investors. 

Funding circle loans typically offer interest rates between 4.99% and 18.99%, with repayment terms up to 10 years. 

Similar to the SBA 7(a) loans, businesses that wish to qualify for funding circle loans must have been in business for two or more years and should have a credit score in the 600s (>660). 

Do Your Research Before You Get a Business Debt Consolidation Loan

Whichever route you decide to take the business debt consolidation route, it’s important to take a realistic look at your financial health and understand your reasons for consolidation. 

That way you can obtain a commercial debt consolidation loan that not only solves your cash-flow issues in the short term but which sets you up for long-term success.

You Could Be Paying Loans Off Faster

It’s not just how much you have to pay but how often you have to pay installments that can get in the way. 

Talk to a loan expert and learn about financing options that let you manage debt flexibly.

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