I’ll walk you through how to consolidate business debt and help you understand the nuances involved in the process—from determining the total amount needed to pay off existing loans and finding a lender, to applying for a loan and ensuring proper payoff of your old accounts. Business debt consolidation can provide multiple benefits, such as simplifying your finances, lowering your total monthly payments, and reducing your interest expenses in the long run.
Step 1: Prioritize the Benefits You Want to Get
Consolidating business debt carries many benefits. However, you may be unable to get all of those as it can depend on the lender you choose, your qualifications as a business, and the type of financing you’re seeking.
Here are some of the benefits you may receive when doing a business debt consolidation:
Step 2: Get Payoff Demands for the Loans Being Paid
This is not a step that’s required this early in the debt consolidation process. However, I highly recommend doing so as it can save you from a lot of headaches later on.
Getting payoff demands serves two primary purposes:
- Verify the loan amount needed. A payoff demand shows the amount needed to satisfy a loan. This includes the principal balance, interest charges based on when the loan would be paid off, and any outstanding fees or prepayment penalties.
- Identify issues with paying off the existing loans. When a lender prepares a payoff demand, it will usually consider all fees and other monetary amounts it deems necessary to consider the debt as paid in full. It also won’t issue a payoff demand if there are issues with doing so, which can occur with a loan that does not allow prepayments.
Getting a payoff demand also allows you to identify any such issues or discrepancies with your loan balance, such as recent payments that may not yet have been considered.
Step 3: Choose a New Loan Type
Since a debt consolidation involves getting a new loan to pay off your existing debt, you’ll have several options for choosing a new loan type.
Term Loan
A term loan—which can sometimes be referred to specifically as a debt consolidation loan, working capital loan, or general business loan—refers to the way the loan is structured. You’ll get a single lump sum of funds that will then be distributed to the various debts to be paid. Rates tend to be competitive, and funds tend to carry little to no restrictions on the type of debt that can be paid—as long as it’s business-related.
Specialty Loan
Specialty loans often have restrictions on what the funds can be used for. In exchange, you can often get more competitive rates and loan terms. One example is equipment financing, in which funds can only be used to finance business-related equipment.
Small Business Credit Line
Funds from a small business line of credit can often be used for any business purpose. This includes the payoff of multiple other business loans in a debt consolidation.
A standout feature of a credit line is the ability to continuously draw funds on an as-needed basis, up to the designated credit limit, which can eliminate the need for you to submit a new loan application whenever you need additional funds. The tradeoff, however, is that even with the best small business credit lines, repayment terms tend to be capped anywhere from 24 to 36 months.
Personal Loan for Business Purposes
A personal loan can be a good option if you do not want to, or are unable, to qualify for a loan using your business credit and finances. Personal loans place a larger emphasis on your personal credit and income when it comes to determining your eligibility for funding, so it can be easier to get if your business has had a slow year.
Some of the best personal loans for business funding can be structured as a credit line or term loan. Home equity loans and home equity lines of credit can also be included if you are willing to put up your house as collateral.
Step 4: Shop Lenders
Once you know which type of loan is best suited for your needs, the next step is to shop lenders to get a preliminary idea of what rates and terms might be available to you. You can do this by visiting different lenders and following their instructions to get a rate quote. Some may require a full loan application, while others have an abbreviated application process just for quotes.
I recommend getting three to five quotes to ensure you’re getting the best deal possible. I also encourage you to explore different types of lenders—such as credit unions, banks, business loan brokers, and online lenders.
In addition to considering available loan programs, types, rates, terms, and qualification requirements, you should look into the following characteristics before deciding which lender you’ll use:
- Application, approval, and funding speeds
- Other business products and financial services offered
- Branch locations and hours of operation
- Ability to access accounts online
- Customer service hours of operation
- Customer reviews and ratings
If you prefer getting assistance throughout the lending process, I recommend a business loan broker like Lendio. You’ll get a dedicated funding manager to match you with the lender and loan program best suited for your circumstances, and with a network of over 75 lenders, you can improve your odds of getting approved—and at the best rates and terms available.
Step 5: Apply & Submit Required Paperwork
Once you’ve decided on a lender, you’ll need to submit a full loan application if it wasn’t already part of the rate shopping process. This is the first step involved with getting a small business loan, after which you’ll typically be asked to provide certain paperwork to verify your eligibility.
Commonly Required Paperwork
Although specific paperwork requirements can vary depending on things like the lender you choose, the nature of your business, and the type of financing you’re seeking, you can expedite the approval process by preparing the following commonly required documents:
- Business and personal tax returns (most recent two years)
- Business bank statements (most recent four months)
- Year-to-date profit and loss statement, balance sheet, and cash flow statement
- Current lease/loan agreements to document ongoing liabilities and debt payments
- Business/professional licenses and permits, as applicable
- Loan agreements for debt being paid off
Qualification Requirements Typically Reviewed
Just like the paperwork that will be required can vary by lender, so too will the specific qualification requirements. Below are common criteria that lenders will evaluate in determining your eligibility and the rates and terms you’ll get:
- Business revenue: The income your company earns is an indicator of its ability to repay debt. Revenue trends can also be evaluated, and companies with a history of significantly declining income may be ineligible even if revenue earned is sufficient to afford the monthly loan payments.
- Credit and credit score: Your company’s credit report provides a lender with a snapshot of the amount of debt it carries. This, combined with information on how much revenue is being earned, will inform a lender as to your company’s ability to take on additional debt. Your business credit score can also be evaluated, as it’s an indicator of how likely you are to continue making timely payments.
- Time in business: Startups and newer businesses have a high failure rate. Banks and lenders know this, and some may only be willing to work with companies that have a long track record of success.
- Collateral: Offering up collateral for a loan can improve your chances of getting approved—and at more beneficial rates and terms. This is because a collateralized loan reduces a lender’s risk of financial loss, as it gives it the ability to take possession of the collateral in the event of a loan default.
Step 6: Sign Loan Agreement & Verify Disbursement of Funds
If a lender issues approval and you agree to the loan terms being offered, you’ll need to sign a loan agreement to formally indicate your acceptance. As the final step in the debt consolidation process, you’ll need to then verify the funds are disbursed and released to the lenders being paid off.
In some cases, your new lender will not make the payoffs for you but will instead issue the funds to you in order to make the final payoffs. Because of this, I recommend contacting your new lender to verify how the loan payoffs will be handled.
Frequently Asked Questions (FAQs)
Yes. Consolidating business debt can be beneficial as it can allow you to save on interest charges, lower your monthly payments, and simplify your finances by reducing the number of separate bill payments you must make.
No. However, some loans have restrictions on how funds can be used. And although rare, some loans do not allow early repayment, which can limit your ability to consolidate certain types of debt.
It depends. Getting a new loan usually places a hard inquiry on your credit report and results in a new account being reported. These actions can slightly lower your credit score in the short term. However, eliminating certain debt as part of the consolidation process, such as a credit card with high utilization, is something that can increase your credit score.
Bottom Line
Consolidating business debt can yield multiple benefits. It can allow you to increase your cash flow by lowering monthly debt payments, saving money on interest charges, and reducing the number of separate payments you make each month. By following the steps in this guide, you can get through the process as quickly as possible and avoid the common pitfalls and mistakes made by other loan applicants.
