Best Business Debt Consolidation Loans

Business debt consolidation loans combine multiple loans into one, and may result in lower payments and interest costs overall. If you have multiple small-business loans from different lenders, you may be a good candidate for business debt consolidation.

A business debt consolidation loan allows you to pay off existing loans and other debts with one new loan. Instead of multiple payments to different lenders, you make a single loan payment each month.

Ideally, your new loan will offer a lower interest rate or lower monthly payment than your current loans do. Lowering your interest rate can potentially save you money, depending on how long it takes you to pay off your loan. Similarly, reducing your monthly payment can free up cash, giving you more money to spend on other business needs.

To qualify for a business debt consolidation loan, you’ll likely need to have good credit and healthy business finances.

Several types of business loans can be used for debt consolidation. Here are a few options:

• Bank business loans typically offer the best rates and terms, but can be slow to fund and difficult to qualify for, requiring several years in business and excellent credit. A secured business loan may be easier to qualify for because secured loans are backed by assets you use as collateral. This means that if you fail to repay the loan, the lender may repossess those assets to cover its losses. 

• SBA loans are a great alternative to bank loans, offering competitive interest rates and long repayment terms. The 7(a) loan program is the SBA’s primary business loan program and can be used to refinance current business debt. Because these loans are partially guaranteed by the U.S. Small Business Administration, it can be easier to qualify, but SBA lenders still usually require good credit and multiple years in business. Like bank loans, SBA loans can be slow to fund.

• Online business loans may be a good option for newer businesses or those with fair or bad credit. Although they typically have flexible qualification requirements, expect higher interest rates and shorter repayment terms. These loans tend to fund much more quickly than bank and SBA loans.

• Nonprofit loans are designed to benefit low-income and underserved communities that can be a good option for women, minority and veteran business owners. These organizations may provide a range of loan options and how the funds can be used varies by lender. Nonprofits also typically offer business training, coaching and other support services.

The process of business debt consolidation will vary based on your existing debt, business qualifications and lender, among other factors. Here are a few steps to help you get started:

Start by determining the total debt you owe, including existing loan balances, repayment terms and interest rates. Make note of any loans that have prepayment penalties if you pay off the balance early or ones with very low interest rates.

The best candidates for debt consolidation are loans with high interest rates and no (or minimal) prepayment penalties.

Lenders use your personal credit score, business credit score, time in business and annual revenue to see whether you qualify for a loan. They may also consider additional factors such as your cash flow, sales projections and collateral.

Although some online lenders are willing to work with borrowers who have low credit scores, you’ll get the most competitive rates and terms with a credit score of 650 or higher.

Research multiple lenders to see what type of business debt consolidation loans they offer and compare factors such as:

Consider the benefits and drawbacks of any potential loan options as they compare to your current debt obligations. For example, a loan with a longer repayment term may provide lower monthly payments, but you may be paying more interest in the long run. If lowering your monthly payment is your top priority, however, this may be a tradeoff you’re willing to accept.

The application process varies from lender to lender. In general, you’ll need to provide:

• Basic information about you and your business.

• Personal and business bank statements.

• Personal and business tax returns.

• Business financial statements.

If approved, you’ll be asked to sign a business loan agreement. Review it thoroughly and reach out to your lender if you have questions or need clarification on any of the terms.

You may receive loan funds directly to pay off your existing debts yourself or, in some cases, the lender may pay your debts. You’ll want to discuss the repayment process ahead of time with your lender and also get details about when your first loan payment is due.

If you don’t qualify for a business debt consolidation loan or decide it’s not the best option for your business, here are some alternatives to consider:

If you can’t roll all your business debt into a single loan, refinancing one or more loans individually may be a good alternative.

• Pro: Refinancing loans individually could result in a lower interest rate or a lower monthly payment.

• Con: Because you’re not consolidating debt, you’d continue to make multiple payments each month to different lenders.

If consolidating or refinancing isn’t possible, employing a debt payment strategy may be an option. For example, if you want to reduce the number of loans, focus on paying more toward the debt with the smallest balance while making minimum payments on the others. After that debt is paid off, move to the next smallest debt.

If you’d rather reduce the amount of interest you’re paying, focus on paying more toward the debt with the highest interest rate while making minimum payments on the others. After that debt is paid off, focus on the debt with the next highest interest rate.

• Pro: The number of lenders you pay each month or the amount of interest you pay will be reduced over time.

• Con: The existing interest rates and monthly payments will remain the same until you pay off the loans.

If you’re having a hard time making monthly debt payments, you can reach out to your lenders to see if you can restructure your loans or make interest-only payments for a while. The goal with restructuring a loan is to find an option that benefits both you and the lender.

• Pro: You may be able to lower the interest rate on the loan, extend the loan term, reduce the loan amount or pause payments for a period of time.

• Con: Restructuring a business loan will usually affect your credit score, but will likely do less damage than defaulting on the debt.