Small business debt consolidation loans can lower your interest rates, reduce your monthly payments, and even allow you to borrow additional funds. Knowing when it’s the right time to consolidate business debt depends on the terms of your existing debt, your business’s current finances, and your personal credit. Applying for a business debt consolidation loan at the right time will increase your chances of getting approved for a great loan. This article covers:
- When to Consolidate Business Loans
- Six Benefits of Business Debt Consolidation
- Two Options for Small Business Debt Consolidation Loans
- How to Consolidate Business Loans With Able Lending
SBA Loans are typically the best option when consolidating business debt, because they offer lower rates and longer repayment terms than other financing sources. This can help you lower your monthly payments in addition to streamlining your payment process. SmartBiz can get you approved for up to $500K and funded in as quick as 30 days.
When to Get a Small Business Debt Consolidation Loan
Consolidating at the right time can get you a great loan with lower interest, a better repayment schedule, a longer term, and possibly allow you to borrow more. Consolidating at the wrong time can be a waste of energy, hurt your credit, or get you a bad loan that can hurt your ability to borrow in the future.
We asked Mihir Kroke of Able Lending when the right time to apply for debt consolidation was, and this was his reply:
“There are two timelines to keep in mind when consolidating business loans. Timeline #1 applies if you had good credit and took out a short term loan because you needed the quick-turnaround time of a short term loan provider. In that case you can apply for a consolidation loan right away. Just beware of prepayment penalties. Timeline #2 applies if you took out short term debt because your finances or credit wouldn’t allow you to qualify for anything better. In that case you would want to wait for three months of positive revenue trends before applying for a consolidation loan in order to increase your chances of approval.”
In other words, unless you’re consolidating loans you took out for expediency’s sake, you should consolidate your business debt when you are a better applicant for a loan than you used to be. There are many ways to accomplish this.
Here are 5 milestones that may indicate that it’s a good time to consolidate your business debt:
- Improved Personal Credit Score
- Improved Business Credit
- Improved Personal Finances
- Improved Business Finances
- Increasing Your Time in Business
1. Improved Personal Credit Score
If your personal credit score has significantly improved since you last borrowed money, then now might be a good time to consolidate your business debt. An improved credit score is an important qualification for lower interest rate, longer term loans.
Your credit score improving by only a few points is not likely to qualify you for a better loan. Also, no matter how much your credit score improves, negative credit events like bankruptcies, tax liens, or repossessions can make qualifying for a small business debt consolidation loan nearly impossible.
Credit Score Milestones for Business Debt Consolidation
SBA Loans with 10-Year Terms
- 680+ (Check your credit score here for free)
- Consistent long term history of making timely debt payments
- Good for refinancing short term loans, alternative loans, equipment financing, etc.
Consolidation Loans with Up To 5-Year Terms
- 600+ (Check your credit score here for free)
- Consistent recent history of making timely debt payments (3-6 months)
- Good for refinancing MCAs, short term loans, credit card debt, etc.
Able Lending makes consolidating business loans quick and easy. With rates starting at 8% and terms of up to 5 years, they are a great fit for businesses that are ready to get a handle on their unaffordable short term debt. Plus, an Able Lending loan comes with a fraction of the paperwork of an SBA loan. Get prequalified online in just a few minutes.
2. Improved Business Credit Profile
Showing an improvement in your business credit usually involves showing that you are a more responsible borrower. This means that you generally do not have more debt than you can handle, and that you are not using the full value of your available credit lines. If you have recently improved these two things then you should look into consolidating your business debt.
A good business credit profile will generally have:
- Multiple companies reporting
- Positive (timely) payment histories
- A high percentage of available credit line you are not using
- No reporting errors
- No bankruptcies, repossessions, or tax liens
To learn more about how business credit reports work and how you can build your business credit, read our in-depth article here.
3. Improved Personal Finances
Your personal financial health is just as important as your business’s financial health. That’s because you’ll be asked to personally guarantee the business consolidation loan. The lender needs to feel confident that if your business were unable to make the payments, you’d personally be able to repay them somehow.
Here are some ways your personal finances might show improvement:
- Increase in income
- New sources of income
- Recent reduction of outstanding debt
- Increased equity in a piece of real estate (that you’re willing to pledge as collateral)
- Fewer dependents or reduced necessary household expenses
Any significant improvement to your personal finances will increase your chances of qualifying for a consolidation loan with better rates, longer repayment terms, and a more convenient repayment schedule.
4. Improved Business Finances
It’s best to approach a lender about a business consolidation loan when your business finances (revenues & profitability) have a positive trend. Your ability to qualify for better financing terms can improve quickly if you have a successful month, quarter, or year. Right after accomplishing an important business objective is usually a good time to think about consolidating.
Here are some situations that can improve your ability to get funded for a consolidation loan:
- Finished a busy season
- Filed most recent taxes (showing improved profitability)
- Increased revenues significantly
- Lowered expenses significantly
- Revenues have grown steadily for the last 3-6 months
Any time your business’s revenue or profitability has increased for 3+ consecutive months, it may be a good time to consider consolidating your business debt. If you fall into one of the situations above then here are some general guidelines to keep in mind before you apply:
SBA Loans with 10-Year Terms
- Reach $120,000+ annual revenue
- 3+ months of upward trends
Consolidation Loans with Up To 5-Year Terms
- Reach $25,000+ annual revenue
- 3+ months of upward trends
5. Time in Business
The longer your business has been operating, the more financing options are available to you.
Many lenders set a minimum time in business to qualify for their loan products. The most common minimum requirements lenders set are:
- 3 months
- 6 months
- 1 year
- 2 years
When your business hits a new milestone, you have likely just opened up an entirely new type of business financing. If you’ve been juggling credit cards, short term loans, or MCAs, you are much more likely to qualify for a small business consolidation loan once you hit the next milestone.
An important thing to note is that, in most cases, lenders will not consider time that your business was idle (not operating or generating any revenue) as counting toward time in business.
When your business hits a new milestone, you have likely just opened up an entirely new type of business financing. If you’ve been juggling credit cards, short term loans, or MCAs, you are much more likely to qualify for a small business consolidation loan once you hit the next milestone. SBA loan typically require 2 years time in business while term loans generally require only 1 year in business.
SmartBiz is an SBA loan provider that can approve you for up to $500K with lower interest rates and longer terms than other loan consolidation options. You can generally get approved if you have 2+ years in business, are profitable, and have a 680+ credit score.
Six Benefits of Business Debt Consolidation
While refinancing can help reduce your overall loan costs, it is not the only benefit. Refinancing business debt can generally help your business do 5 things:
- Reduces APR
- Lower Monthly Payments
- Allows for Additional Borrowing
- Simplifies Cash Flow Management
- Frees Up Revolving Credit Lines
- More Predictable Payments
Below we cover each benefit in more detail to help you understand if your goals for refinancing or consolidating your business debt can be met.
1. Reduces APR
Reducing interest rates is a very common goal for small businesses that have taken out a short term business loan or a merchant cash advance. While there is certainly a place for short term, higher APR financing, that financing is not sustainable long term. A small business debt consolidation loan comes with lower APR than nearly every short term financing option available..
2. Lower Monthly Payments
Business loan consolidation typically results in lower monthly payments. A lower monthly payment can ease current strains on your business’s cash flow. That means you’ll have more cash available for normal operating expenses and unexpected opportunities. It may also allow you to avoid additional borrowing in the future.
All else equal, small business consolidation loans result in lower monthly payments because they have a lower APR and a longer repayment term
3. Allows for Additional Borrowing
When small businesses consolidate their loans, they may qualify for additional borrowing. That’s a result of the lower APR and longer repayment terms, which increases the business’s DSCR.
It’s not uncommon for small businesses to require some additional working capital when consolidating business debt. The additional working capital ensures they do not have to take out short term debt again anytime soon
4. Simplifies Cash Flow Management
A business consolidation loan can help you better manage cash flow in three ways. First, rather than juggling multiple creditors, you will now manage just a single account. Second, rather than dealing with multiple payment dates, and even multiple payment schedules (daily, weekly, semi-monthly, monthly, etc.) you’ll have just one monthly payment. Third, The lower rate and longer repayment term will result in a smaller monthly debt payment. That means more cash in the bank to cover regular expenses.
5. Free Up Revolving Credit Lines
Revolving lines of credit, especially credit cards, are an incredibly useful cash flow management tool. The give a business a high degree of flexibility in their spending since you can float bill essentially interest free so long as you pay the card in full each month. However, if you’ve built up a balance on the line, you lose flexibility and probably have relatively expensive debt payments.
Consolidating small business credit card debt with a business consolidation loan not only makes the monthly debt payment more affordable, but it frees up your credit line again. You’ll have a more affordable loan and a revolving line of credit that’s ready to be put back to work.
6. More Predictable Payments
Many short term loans that are consolidated have variable interest rates. This means that the payment changes over time, and you can’t accurately budget the same amount on every payment date. This can be very frustrating if your payments end up being more than what you expect.
A consolidated business loan with a fixed interest rate helps you more accurately budget what your loan costs will be through the entire term of the loan. You will not have the unexpected payments or frustrations that a variable interest rate loan can bring.
SBA Loans are going to normally give you the lowest interest rates and longest repayments available, which makes it a great fit to consolidate business debt. SmartBiz can get you an SBA loan of up to $500K, typically funded in as fast as 30 days.
Two Options For a Small Business Debt Consolidation Loan
Not every type of loan is a good fit when looking at refinancing your business debt. Many short term business loans, for example, get refinanced or consolidated themselves. These loans are often more expensive the longer you keep them, and are meant to be paid off or refinanced within 12 months.
Generally there are two main options for borrowers looking to refinance their business debt:
- Term Loans
- SBA Loans
The table below shows a general summary of qualifications and terms for medium term business loans and SBA loans.
Options For Refinancing Small Business Loans at a Glance
|Term Loan||SBA Loan|
|Business Revenue||$25,000+||$100,000+ and trending up|
|Collateral||Blanket lien on business assets||Lender may require some collateral, and will place a blanket lien on business assets|
|Time in Business||1 Year||2+ Years|
|Time to Receive Funds||1 Week - 30 Days||Typically 45 - 60 Days|
|Time For Approval||1 - 3 Days||As quick as 1 week|
|Payback Time Period||1 - 5 Years||10 Years|
|Loan Amounts||$5,000 - $500,000||$30,000 - $350,000|
|APR||10% - 40%||6% - 9.5%|
|Origination Fees||2.5% - 5%||4% + Guarantee Fee of 3- 3.5% on loans above $150,000|
|Visit Able Lending||Read About SBA Loans|
Now let’s look at qualifications, timing, and costs in greater detail.
Qualifications: Term Loan vs. SBA Loan
Term Loan: You can generally qualify for a medium term business loan to refinance your business debt if you have a personal credit score of 600+, been in business for at least 1 year, and your gross annual revenue is $25,000 or more.
SBA Loan: In general, qualifying for an SBA loan to refinance your business debt will require a personal credit score of 680+, been in business for 2+ years, and revenue of at least $100,000.
Time to Funding: Term Loan vs. SBA Loan
Medium Term Business Loan: You can be pre-qualified in 5 minutes, fully approved within 1 to 3 days, and receive your funds as quick as 1 week.
SBA Loan: You can qualify within 1 week, and the underwriting process can complete in 1 – 2 weeks. However, typically funding takes 45 – 60 days.
Costs: Term Loan vs. SBA Loan
Term Loan: The APR for these loans generally range from 10% to 40%. This includes an origination fee that ranges from 2.5% to 5%.
SBA Loan: An SBA loan must follow the maximum guidelines set by the SBA, which can change. Generally the interest rates will fall between 6% and 8.5%, with fees raising the total APR as much as full 1% on top of the interest rate. Origination fees can be as much as 4% of the total loan amount, plus a fee the SBA charges to guarantee the loan on loans above $150,000. That guarantee fee can be as much as 3% – 3.5%. You can see current SBA rates here.
While an SBA loan can be a great option, they have very strict qualifications. Not only that, but obtaining an SBA loan can easily take 2 – 3 months and involve processes that can seem excessive or invasive (like obtaining landlord subordinations, looking closely at all revenue streams and investments, etc). A term loan may be a better option for you if you need the loan quickly or if do not want to deal with the frustrations and headaches of an SBA loan process.
SBA loans have rates between 6-9% and terms of up to 10 years. They are a great fit for business that are ready to solve their short term debt issues by spreading out those payments for a much longer period of time. SmartBiz offers SBA loans of up to $500K, and can get you funded in as fast as 30 days.
How to Consolidate Business Loans with Able Lending
Small business term loans are typically faster than SBA loans, require less paperwork, and do not have the same collateral requirements.
“If you’re an established business that has shown profitability for the past few years, then an SBA loan is probably going to be the cheapest borrowing product available to you” said Mihir Kroke of Able Lending. “But they also have an intensive application process and slow funding times. We think Able Lending’s consolidation loans are second in line to the SBA in respect to the pricing and repayment terms. But the application process is much simpler and the funding times are much shorter.”
Able Lending’s advantage over other medium term loans is that they can offer the same borrower cheaper loans with longer terms, and they typically lend more than their competitors. They are able to offer such great consolidation loans because of their unique backer requirement.
Discussed below in greater detail, the backer requirement makes you raise at least 10% of your consolidation loan from friends, family, and backers. You get to choose the interest rate you pay on the money you fundraise and your backers get a monthly payment with interest. The backer requirement reduces Able Lending’s risk and allows them to lower your interest rate, increase the amount they lend, and increase the length of the repayment term. In fact, Able Lending has found that their customers save an average of $5,000 per month.
Able Lending Qualifications and Terms at a Glance
|Time in Business||1+ Years|
|Time to Receive Funds||Within 1 week of of your backer’s funds being raised|
|Time For Approval||Prequalify in minutes, approved in 5 days|
|Payback Time Period||1 - 5 Years|
|Loan Amounts||$25,000 - $1,000,000|
|% of Funds Raised From Backers||10% - 50% from at least 2 sources|
|APR||Average is 16%|
How an Able Lending Business Debt Consolidation Loan Works
A business debt consolidation or refinancing loan from Able Lending generally has 4 main steps.
- Able Lending Underwrites Your Loan
- Raise Money from Your Backers
- Get Funded
Let’s take a closer look at each step below.
Applying online is easy and can be done in a matter of minutes.
After Able Lending pre-approves your loan, they’ll connect you to one of their loan specialists to discuss next steps. Able Lending will do a soft credit check at this point, but it will not impact your credit score.
#2 Able Lending Underwrites Your Loan
If you decide you want to move forward then you will submit your financials and go through a full underwriting process to get approved. A full credit check will be done at this point. Once you are approved, Able Lending will tell you how much you qualify for and how much of the loan you must raise from your backers.
#3 Raise Money from Your Backers
This is the unique part of the process that sets Able Lending apart from other business term loan providers.
In most cases, Able Lending will require you to raise a minimum of 10% of the loan from backers. (Prime borrowers may not have to raise any funds. Borrowers with damaged credit may be required to raise more.) While the minimum backer amount is 10%, the average borrower is asked to raise 15% – 20% on average.
You can raise money from friends, family members, customers, fans, advisors, or anyone else that may see backing your business as a good opportunity. Your backers earn interest on their loan to you and receive regular monthly payments (all processed by Able Lending, which makes things very easy for you).
Once you have the committed capital from at least 2 sources, Able Lending will collect the funds and disburse them with the rest of the loan amount. This eliminates a lot of administrative headaches for you, and gives you a more professional capital raising experience for your backers. You can negotiate what interest you pay your backers, with a minimum of 2%.
#4 Get Funded
Once Able Lending has the money from your backers, they will complete the loan process. From that point, it typically takes less than 1 week to receive funds.
All loan payments are made directly to Able Lending, and they make sure that your backers receive their portion of the payment each month.
Able Lending: Borrow More at Better Rates with Better Terms
By leveraging your biggest supporters, Able Lending can typically get you a larger loan at a better rate and with a longer repayment term than their competition.
Fundraising the 10% required for most loans is easy with Able Lending. Their platform allows you to raise money from your friends and family painlessly, without having to worry about drawing up promissory notes, tackle tax issues, or figuring out how to service the loan. Not only does it make the process much easier, but their fundraising platform helps your offering look professional.
Able Lending approves you for your loan amount based on the amount you are going to raise from backers. This can help you gain access to additional funds that you would not get from other medium term loan providers.
Key Factors for Qualifying for a Business Debt Consolidation Loan
|Definition||Common Minimum Requirements|
(Check yours for free here)
|A number indicating whether or not a borrower is a risk to lend money to, or do business with.||Term Loan: 600+
SBA Loan: 680+
|Time in Business||The length of time your business has been registered and receiving revenues.||Term Loan: 1 Year
SBA Loan: 2 Years
|Annual Revenue||Total amount of money your business received for the whole year.||Term Loan: $25,000+
SBA Loan: $120,00+
|Profitability||The amount of money the business generated after all expenses were paid.|
Calculated by: Revenue - Expenses (including all salaries of owners and other discretionary earnings)
|Profitable and trending up|
|Real Estate With Equity||The equity in real estate is the difference between the fair market value of the property and what is owed on any outstanding loans or mortgages.||15%+ of Property Value|
|Debt to Service Coverage Ratio (DSCR)|
Debt Coverage Ratio (DCR)
|The ratio of cash available for debt servicing for interest, principal, and any lease payments. |
Calculated by: Net Operating Income / Total Debt Payments
|Greater than 1.20 after the new loan terms are calculated in with your financial performance.|
|Credit Utilization Ratio||The percentage of a consumer’s available credit that is being used.|
Calculated by: Outstanding Credit Balances / Sum of Total Credit Limits
(Displayed as a percentage)
|Less than 35%|
Consolidating your high interest, short term business loans can make a huge difference to your business’s bottom line. While an SBA loan is a great option for business consolidation, they can be difficult to qualify for, require lots of paperwork, and take 2-3 months to obtain. Online lenders have stepped in to offer term loans in a fraction of the time and with much easier application processes.
SBA loans offer the best loan consolidation option because of their low interest rates between 6-9%, and their long repayment terms of up to 10 years. SmartBiz offers SBA loans of up to $500K. You can typically qualify if your business has 2+ years of history, is profitable, and you personally have a 680+ credit score. You can prequalify with SmartBiz within minutes by filling out an online application.