Understanding business debt consolidation
Key takeaways
Consolidating business debt typically involves opening a new loan, possibly with more favorable terms, and using those funds to pay off existing debts.
Consolidation may simplify finances or free up cash flow for a business owner.
Multiple consolidation options exist, such as working with a traditional bank or an online lender to obtain a loan.
What is business debt consolidation?
The core concept:
Business debt consolidation generally involves opening a new loan in order to pay off existing debts such as other loans, lines of credit, or credit card debt. Consolidating business debits into one loan often allows for a single payment.
Consolidation vs. refinancing:
Refinancing often occurs with a single loan and may be initiated by a business owner to get better terms, such as a lower interest rate.
The Raisin platform allows you to compare and fund competitive competitive savings options to help build your financial foundation.
Benefits of consolidating business debt
- Simplified financial management: Making one monthly payment may be a simpler process than making multiple payments.
Improved cash flow: Consolidating business debts may allow you additional access to cash to help cover operating expenses.
Predictable repayment: Once consolidated, the monthly payment and interest rate may stay the same for the life of the loan, which can be helpful when it comes to budgeting. Having a set loan term can also help business owners more readily identify when the loan is expected to be paid back.
Common business consolidation options
Traditional bank term loans
One consolidation option involves working with a traditional bank or a credit union. Banks and credit unions may have eligibility requirements for business owners, such as age of the business, credit history, and the business’ cash flow.
SBA 7(a) loans
The U.S. Small Business Administration (SBA) works with lenders to provide loans of up to $5 million to small business owners. These loans are typically available to business owners who plan to use them for working capital, to buy machines, furniture, or other equipment, and other business-related actions. Business owners may need to meet specific criteria to obtain an SBA loan, such as meeting a certain credit level and showing that they are able to pay back the loan.
Business credit card balance transfers
Some business owners may choose to consolidate business debt by transferring business credit card balances to a new card. Owners choosing this option tend to look for favorable terms such as an initial 0% APR period. Balance transfers may involve paying a fee based on the total transfer amount.
Online term loans
Business owners may have the option of working with an online lender to consolidate debt. Like working with a traditional bank, online term loans may involve eligibility requirements.
Is debt consolidation right for your business?
When it makes sense
Consolidation might make sense for your business if the new loan comes with more favorable terms, such as a lower interest rate than your current debts. It may also be an option if a business owner is currently experiencing difficulties with making payments on multiple forms of debt.
Potential drawbacks to consider
Consolidating debts may involve paying origination or processing fees, and some loans may include penalty fees for prepayments. Opening a new loan could also impact your credit score since a lender will often need to make a hard credit inquiry. Some loans might require assets for collateral, which might be put at risk if you become unable to make payments. Depending on the loan’s terms, there may be a higher total repayment cost when adding up total interest paid during the loan’s term.
Prepayment penalties
Some loans may come with penalties for prepaying. Penalty fees may vary depending on the type of loan and the lender.
How to apply for a consolidation loan
Inventory debt
It can be helpful to create a list of all current business debts and their associated interest rates, balances, and terms.
Check your credit
Personal and business credit history may impact eligibility for a consolidation loan. Different lenders may have different credit history criteria, and getting an overall picture of your credit may help you decide which consolidation loan options might work for you.
Prepare documentation
Applying for a consolidation loan often requires multiple pieces of documentation, such as tax returns for your business, business bank statements, or balance sheets.
Bottom line
Consolidating multiple debts into one new loan may make sense for some business owners. There are different consolidation loan options available, and taking time to review the options can be helpful.
While Raisin doesn’t offer consolidation loans, it gives you access to a marketplace of high-yield savings products that can help you build your financial foundation.
Frequently asked questions
Can I consolidate personal and business debt together?
You may be able to consolidate both personal and business debt together. However, there may be risks associated with it, so you may want to speak directly with your lender about any advantages or disadvantages.
Will consolidating debt hurt my business credit score?
Opening a consolidation loan may mean a lender makes a hard inquiry into your credit score, which could temporarily impact the score.
What is "reverse consolidation"?
Reverse consolation typically involves a lender providing funds specifically to cover multiple merchant cash advances.
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
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