Money Matters

How to Choose a Business Debt Consolidation Loan

You may be a good candidate for business debt consolidation if you have multiple business loans. When you consolidate your business debt, you replace your existing debts with a single loan. A business debt consolidation loan can provide you with lower monthly payments, a shorter payment period, or both.

Those with high-interest rates are guaranteed to save the most by consolidating business debt into one loan. But this may not be the best option for every small business owner. Not all consolidations will save on interest, offer better rates, or solve cash flow issues.

Moreover, not all borrowers will be a good fit. Newer businesses and those without a strong credit history may find online lenders offer better options. But established businesses with a strong track record can get the best rates and longest payment terms from traditional banks.

Here’s a closer look at how a small business loan can help with your business debt consolidation.

How does business debt consolidation work?

Business debt consolidation is when you take out a new business loan to pay off your existing business loans and debt. Taking out a small business debt consolidation loan transfers multiple debts into one streamlined monthly payment.

Oftentimes, business debt consolidation works just like personal debt consolidation. This allows you to roll your debt into one manageable payment. Debt consolidation loans can provide a longer repayment period, a lower interest rate, or both.

If you don’t see both benefits when looking for a business debt consolidation loan, consolidating may not be in your best interest.

How to consolidate business debt?

While each lender’s business loan requirements will differ, most will look at factors such as your income, credit score, and debt-to-income ratio. Below are some steps you can take to get a commercial debt consolidation loan:

Calculate how much you owe

Calculating the total amount you owe is the first step to consolidating your business debt. You can do this by adding up your payment balances for all your debts to get a total.

Then use the business loan calculator to see how much business credit is available. This will show you the total loan amount you can afford, your monthly payments, and how much interest you will pay over the life of the loan.

Check your credit score

Credit reports to help lenders determine your personal and business credit scores and creditworthiness.

The higher your credit score, the easier it will be to get an affordable business loan. For the best rates, you’ll want a personal credit score of 650 or higher, but bad credit business loans for business owners with poor credit.

Explore business debt consolidation options

There are many business debt consolidation options available. Here are a few types of business loans to consider:

  • Bank loans:¬†Traditional banks and credit unions are the most well-known options for getting a business debt consolidation loan. To qualify, you typically need to be in business for two or more years and have positive cash flow and a strong credit history.
  • SBA loans: The federal government offers loans to small businesses needing financing. Small Business Administration (SBA). Several SBA loans are available for businesses, including SBA 7(a) and microloans.
  • Alternative loans:¬†For those who can’t get a traditional loan and don’t qualify for an SBA loan, alternative lenders are known for easy eligibility requirements and fast funding. Types include alternative lenders, online lenders, crowdfunding platforms, direct personal lenders, and peer-to-peer lenders.
  • Business line credit. With a business line of credit, you get funds quickly and pay interest only on the amount you use. As you pay off the balance, you get more credit to use.
  • Business credit card balance transfer. If you have a business credit card and qualify for a 0% introductory balance transfer APR, this option can be a way to reduce business debt. Instead of consolidating through a loan, you transfer loan balances to a credit card. This option should only be used if you repay the balance before the access period expires. If not, interest charges can put you back into debt.

Compare business debt borrowers

Not all debtors are equal. Comparing them can help determine which lender offers the best business debt consolidation loan. When getting a business loan, compare borrowers to see the best options.

You’ll want to look at more than the loan amount and the interest. Compare additional costs, payment terms, and any other additional costs.

If you want to make online payments, you may wish to use a tech-savvy bank or online lender. But a credit union or traditional bank may be better if you want to make payments in person or by mail.

Collect documentation and other information.

After choosing a lender, it’s time to gather your documents and other information to prepare for the next step. The types of documents you need may vary by lender, but expect to provide the following:

  • Personal documentation on other sources of income, background, and finances.
  • A business plan, including how you plan to repay the loan and allocate funds to increase revenues.
  • Proof of business ownership and status, insurance, license, legal document circulation
  • Two years of tax returns, profit and loss statements, bank statements, and cash flow projections.
    Salary records.

Apply for a loan

Now you are ready to apply for a loan. Being prepared for the previous steps will make this step easier. Most lenders offer an online application, which may require only minimal paperwork initially.

After you submit your application, the lender will review it and contact you to discuss eligibility and further paperwork requirements. Depending on your lender, it can take minutes or days to decide. After that, especially with an SBA loan application, it may be necessary for the lender to get what they need to make a decision.

Close the deal

After the lender approves your application, closing the deal is time. Make sure the interest rate and payment terms are more favorable than what your current loans offer.

You will meet with the lender or sign the loan documents online. Before signing, read the documents carefully and thoroughly to understand the lender’s expectations, any charges or penalties you may be assessed, and the process for paying off our remaining loans with a business debt consolidation loan.

Once you receive the funds, you will pay off your existing debts, or your lender can do it. You will then start making payments on your new loan.

Pros and cons of business debt consolidation

So, is a business debt consolidation loan worth it? This method can be a good option to streamline your payments. But before applying, you need to know the advantages and disadvantages.


Business debt consolidation makes sense for several reasons. Here are three examples to consider:

  • Lowers your interest rate:¬†Consolidating your debt into one loan often lowers your interest rate. This is good news for business owners. Especially during the coVID-19 pandemic, spending cuts can mean the difference between survival and going under.
  • It’s easier to pay: One of the biggest reasons small business owners choose business debt consolidation is to streamline payment. Instead of mailing several checks monthly or visiting multiple debtors’ websites to make payments, you only make one if you consolidate your debt.
  • It frees up cash flow: When you consolidate your debts, you are often given a new loan with fresh terms. Lenders may allow you to decide to extend this term, which enables you to have lower monthly payments. However, be aware that this will cost you more in interest over the life of the loan. So you need to decide whether you need a longer period to improve your cash flow or give yourself more time to pursue opportunities or purchase equipment.


Debt consolidation loans offer business owners many benefits but can also be risky. Below are three major downfalls:

  • Credit terms are extended: You start fresh when you consolidate your debt. This often means extending the term of your loans and ultimately paying more interest. Worst of all, if you take out a business loan that doesn’t help your business make more money, you’ll end up in a bigger debt hole.
  • You need a high credit score to get the best rates: Buyer, beware. Not everything is as it seems when it comes to business debt consolidation. You may have to pay more interest than advertised, depending on your credit score. “If you can get a well-structured deal, interest rates are pretty low right now,” Knauer said. “But with debt consolidation loans, the best deals are for people who don’t need them.”
  • Not a miracle cure: Consolidating your debt makes it easier to manage, but it doesn’t eliminate the deficit. It also does not eliminate the reasons for coming there in the first place. The last thing you want is to pay off your debt only to have it piled up again.


Business debt consolidation can improve your cash flow, provide more manageable payments, improve your credit, or help you pay off your debt faster. But it’s not a cure for existing financial problems; it might not get you a better interest rate and increase the amount of interest you pay.

If the pros outweigh the cons, it’s worth taking steps to get a business consulting loan. You have several options depending on your business’s financial and credit history and debt. There are traditional lenders, online solutions, SBA loans, and even credit card balance transfers to consider.

Back to top button