Small Business Debt Consolidation Loan: When to Consolidate Business Debt

A small business debt consolidation loan can lower your interest rates and reduce the size of your payments by taking your existing debts and refinancing them into one loan. Knowing when the timing is right for business debt consolidation depends on the terms of your existing debt, your business’s current finances, and your personal creditworthiness.

SBA loans will likely offer you the best rates and longest repayment terms of all business consolidation loan options. SmartBiz may be able to help you consolidate up to $350,000 in business debt with SBA financing. Their loans have low rates with 10-year terms and monthly payments. You can pre-qualify online in minutes.

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How Business Debt Consolidation Works

Business debt consolidation is the act of taking existing business debts, which may be made up of multiple loan sources and interest rates, and refinancing that total debt into one loan. By utilizing business debt consolidation, you reduce the number of monthly payments your business is making, as well as the variability of interest rates on that debt.

Who a Small Business Debt Consolidation Loan Is Right For

If your financial position, or credit score, has improved since you originally took out your existing debt, you may now be eligible to get better rates and terms than you were able to get originally. If you are able to get more favorable rates and terms, you may want to consider small business debt consolidation.

Some indications that you may want to consolidate your small business debt are:

• Your personal credit score has improved
• Your business credit profile has improved
• Your personal finances have improved
• Your business has reached a new milestone

How to Get a Small Business Debt Consolidation Loan in 6 Steps

Consolidating your business loans generally starts with understanding what type of debt you’re consolidating, and what the terms of that debt are. Depending on the amount you need and what your current terms are, your consolidation options may change.

For less than $35,000 of debt, business credit cards may be your best option. You can apply online and typically get access to funds the same day if you’re approved. If you’re looking for a small business credit card, check out our article on the best small business credit cards.

SBA loans will likely be your best option when consolidating larger amounts of debt, if you’re able to qualify. These loans can carry a lot of paperwork and take a lot of your time during the application process. You can learn more about the application process by reading our article describing how to get an SBA loan.

The six steps to consolidate business loans are:

1. Research the Terms of Your Current Debt

Some of your current loans may have obstacles that prevent you from consolidating them, like abnormally high prepayment penalties. According to Michael McCord, CPA and Managing Partner of McCordial & Company:

“Some of the lesser-known mistakes I see people make is not factoring in prepayment penalties or intangibles during consolidation. The initial inclination is commonly to consolidate the highest interest rate loans first. However, oftentimes I’ve seen folks not adequately consider the cost of prepayment penalties or other refinancing costs into the math.

“Further, intangibles such as operational covenants, or whether loans are full recourse (personal recourse), limited recourse, or no recourse at all, can be a huge deal. Consolidating to a slightly cheaper interest rate can be a mistake if it means potentially violating covenants or personally guaranteeing significantly more debt.”

Being aware of these aspects of your current loan covenants is important. They may have been unimportant when you first borrowed, but they could make a significant difference when you’re consolidating.

2. Compare Your Current Debt to Your Potential Consolidation

Now that you have all the details, you can look at whether consolidating will actually save you money, or if it at least has the potential to do so. Taking everything into consideration, you can then weigh your options.

It may not make sense to move forward with the process at this point. If consolidation could cost you more money, then you likely don’t want to go through the long application process of getting an SBA loan. However, consolidating your business loans is typically the best option if you currently have debt that you’re struggling to keep up with.

3. Determine What Debt You Want to Consolidate

You may be in a position to consolidate some, but not all, of your debt. Or some of your current loans may have good terms that you want to keep while others do not. You need to know how much debt you’re consolidating, and which loans you’re going to convert into a new loan, before you start applying.

4. Determine if You Qualify

While the exact qualifications for debt consolidation loans vary by lender and loan type, meeting these basic qualifications should make you eligible for business loan consolidation. The basic qualifying factors for loan eligibility are: a credit score of at least 600; a DSCR of at least 1.25x; one year in business; and annual business revenues of at least $100,000.

The typical terms to qualify for a small business debt consolidation loan are:

• Personal credit score: minimum 600 (check your credit score)
• Debt service coverage ratio: 1.25x
• Time in business: One year
• Annual revenue: $100,000 or greater

An SBA loan from Celtic Bank can be an ideal solution if you are looking to consolidate over $350,000 in business debt. Their loans have competitive rates with repayment terms up to 25 years. If you have a credit score of 650+, 2+ years in business, and an annual revenue of $100,000+, you’ll typically qualify for a low-rate SBA loan from Celtic Bank to consolidate your debt. Get prequalified online.

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5. Gather All Necessary Documentation

Now that you’re ready to move forward with a business loan consolidation, you need to make sure you’re prepared. SBA financing, even SBA express loans, can take a long time to fund, and the process is only slowed down if you’re not prepared with the right documentation before you apply. Collecting all of the needed information upfront improves your chances at getting approved.

6. Apply to Consolidate Your Business Loans

Finding the right lender and starting your application process is the final step in consolidating your business loans. This step involves working with a lender to get you and your business approved by their loan underwriting team.

Finding a loan provider, like SmartBiz, will streamline this process because they offer an online application that only takes a few minutes to see if you pre-qualify, and they handle the administrative work for you.

Where to Get 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 almost always meant to be paid off or refinanced within 12 months.

Generally, term loans and SBA loans are the main two options for borrowers looking to consolidate their business debt. The table below shows a general summary of qualifications and terms for both medium-term business loans and SBA loans.

SBA Loans vs Term Loans for Debt Consolidation

Some differences between SBA loans and term loans are:

Qualifications: SBA Loan vs Term Loan

SBA Loan

In general, qualifying for an SBA loan to refinance your business debt will require a personal credit score of at least 680, been in business for at least two years, and revenue of at least $100,000.

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 or greater, been in business for at least one year, and your gross annual revenue is $25,000 or more.

Time to Funding: SBA Loan vs Term Loan

SBA Loan

You can qualify within one week, and the underwriting process can complete in one to two weeks. However, typically funding takes 45 to 60 days.

Term Loan

You can be pre-qualified in five minutes, fully approved within one to three days, and receive your funds in as quickly as one week.

Costs: SBA Loan vs Term Loan

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 a 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% to 3.5%. You can see current SBA rates here.

Term Loan

The APR for these loans generally ranges from 10% to 40%. This includes an origination fee that ranges from 2.5% to 5%.

SBA Loan vs Term Loan Summary

SBA loans can be a great option, but they have relatively strict qualifications. Not only that, but obtaining an SBA consolidation loan from a traditional lender can take two to three months. However, SBA loans are likely your cheapest consolidation option, making them the best option for many. And companies like SmartBiz have streamlined the SBA loan process so that many business owners are funded in under 30 days.

A more alternative term loan may be a better option for you if you need the loan quickly or if don’t want to deal with the frustrations and headaches of an SBA loan process. You’re going to end up paying higher interest rates, causing your monthly payments to be larger than they would be if you waited for an SBA loan.

SmartBiz SBA loans have rates between 6% and 9% and terms of up to 10 years. They are a great fit for businesses that are ready to solve their short-term debt issues. You’ll typically qualify if you have two or more years in business, are profitable, and have a personal credit score of at least 680. Get pre-qualified online in just a few minutes.

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When to Get a Small Business Debt Consolidation Loan

You’ll typically know if it’s the right time to consolidate your debt by events that improve your personal or business credit profile. Consolidating at the right time can get you lower interest rates, better repayment schedules, and longer terms. Consolidating at the wrong time can waste your time, damage 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.

“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’re a better applicant for a loan than you used to be. There are many ways to accomplish this.

Here are five signs it’s a good time to consolidate your business debt:

1. Your Personal Credit Score Has Improved

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 rates and longer repayment terms.

Keep in mind that an improvement in your credit score of only a few points is not likely to qualify you for a better loan, because your increase needs to be significant. 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.

Below we look at what credit improvement milestones you need to make in order to potentially qualify for both an SBA loan and an alternative consolidation term loan. These are likely your two best options when looking to consolidate your debt.

SBA Loans With 10-Year Terms

• 680 or higher (check your credit score)
• Consistent long-term history of making timely debt payments
• Good for refinancing short-term loans, alternative loans, equipment financing, etc.

Term Loans With up to 5-Year Terms

• 600 or higher (check your credit score)
• Consistent recent history of making timely debt payments (three to six months)
• Good for refinancing MCAs, short-term loans, credit card debt, etc.

If you’re looking to consolidate a small amount of debt (under $35,000), then business credit cards can be a great option. They’re typically much easier to get and faster to apply for than either term loans or SBA loans. Business credit cards with 0% rates are also likely your only option, even if they only last for the introductory period.

An SBA loan has more difficult qualification requirements to meet, but they’re typically the best option for debt larger than $35,000. SBA loans help you lower your debt payments by offering lower interest rates and longer repayment terms than other term loans. SmartBiz offers these SBA loans up to $350,000 and repayment terms up to 10 years.

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2. Your Business Credit Profile Has Improved

Showing an improvement in your business credit usually involves showing that you’re a more responsible borrower. This means that you generally don’t have more debt than you can handle, and that you’re not using the full value of your available credit lines. Improvements in both areas make you a good candidate to consolidate 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

Understanding business credit reports, how they work, and how you can build your business credit can be difficult. However, it’s an important skill to manage if you find yourself struggling with expensive debt, and checking your score is the first step.

3. Your Personal Finances Have Improved

As a small business owner, your personal financial health is just as important as your business’ financial health. That’s because you’ll likely be asked to personally guarantee any 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 step in and make those payments.

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. You should also check your personal credit from time to time to stay on top of what your credit score is so that you can hit the minimum requirements for debt consolidation loans.

4. Your Business Finances Have Improved

It’s best to approach a lender about a business consolidation loan when your business finances (revenues and 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.

When you accomplish an important business objective, it’s often a good time to start thinking about consolidating. Anything you can do to paint an upward swing on your business’ revenue or overall financial strength is a big positive in getting approved for a loan.

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 three to six months

Any time your business’ revenue or profitability has increased for three or more consecutive months 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, which are again broken up by either SBA loans or alternative consolidation term loans:

SBA Loans With 10-Year Terms

• Reach $120,000 or more in annual revenue
• Three or more months of upward trends

Term Loans With up to 5-Year Terms

• Reach $25,000 or more in annual revenue
• Three or more months of upward trends

5. Your Business Has Reached a New Milestone

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:

• Three months
• Six months
• One year
• Two years

As your business ages, the amount of opportunities to obtain needed debt relief typically increases. For example, an SBA loan typically requires two years’ time in business, while term loans often require only one year. 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 merchant cash advances (MCAs), you are much more likely to qualify for a small business consolidation loan once you hit the next milestone. You can use our consolidation calculator to determine how much you could save.

If you’ve recently hit one of the milestones listed above, you may qualify for a consolidation loan with SmartBiz. They offer SBA loans with rates between 6% and 9%, and repayment terms up to 10 years. Getting pre-qualified online takes just a few minutes and funding can happen in as fast as 30 days.

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Six Benefits of Business Debt Consolidation Loans

While refinancing can help reduce your overall loan costs, it is not the only benefit. In addition, the six advantages of a small business debt consolidation include a reduced APR, lower monthly payments, opportunities for additional borrowing, a simplified cash flow management process, availability in your revolving lines of credit, and more predictable payments.

More information about the six benefits of business debt consolidation loans:

1. Reduced 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 financing, the cost makes it unsustainable for a long period of time. 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’ 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 being equal, small business consolidation loans result in lower monthly payments because they have a lower APR and a longer repayment term. If your goal is to lower the amount you’re paying on your debt each month, then an SBA loan is likely going to be your best option.

3. Opportunity for Additional Borrowing

When small businesses get consolidation financing, they may qualify for additional borrowing. That’s a result of the lower APR and longer repayment terms, which increases the business’ debt service coverage ratio (DSCR).

It’s not uncommon for small businesses to require some additional working capital when consolidating business debt. The additional working capital should help them deal with the unexpected, or help them afford needed equipment. This will hopefully prevent your business from falling back into getting another expensive, short-term loan in the future.

4. Simplified Cash Flow Management

A business consolidation loan can help you better manage cash flow in three ways:

1. Rather than juggling multiple creditors, you will now manage just a single account.
2. You’ll now have just one monthly payment.
3. The lower rate and longer repayment term will result in a smaller monthly debt payment.

All of these benefits should give you more cash in the bank to cover regular expenses. This will not only improve your financial situation, but it will also streamline your cash flow management process.

5. Increased Revolving Line of Credit Availability

Revolving business lines of credit, especially credit cards, are an incredibly useful cash flow management tool. They give a businesses a high degree of flexibility in their spending since you can float bills, essentially interest free, as 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 are on the hook for 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, or to have on reserve to prepare for the unexpected.

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 expected.

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 offer all six of these benefits, and they do it with the lowest rates and longest repayment terms available. SmartBiz can get you funded you for an SBA loan up to $350,000, and get you funded in as quickly as 30 days. This is much faster than other SBA loan providers, which often take 45 to more than 120 days to fund. You can pre-qualify online within a few minutes.

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Business Debt Consolidation Loans Frequently Asked Questions (FAQ)

A lot of information has been covered in this article about small business debt consolidation loans, when to apply for them, and when business debt consolidation may be a good idea for your business. If you have any questions about any of the information presented here, you can post them in the Fit Small Business forum.

Some common questions regarding business debt consolidation loans are:

What is the difference between a business debt consolidation loan vs a business debt refinancing loan?

Debt consolidation and debt refinancing are terms that are often used interchangeably. However, they refer to two slightly different types of loans. Debt refinancing is generally referring to lowering your interest rates and payment amounts for a single loan. Debt consolidation is the process of combining multiple debt payments into a single loan.

An SBA loan offers you the option to either refinance or consolidate your debt. Either could lower your overall payment amounts and simplify your cash flow process to set your business up for a greater amount of success moving forward.

How does business debt consolidation work?

With a business debt consolidation loan, you work with a lender to take out a loan large enough to pay off your other debts. Once your other debts are paid off, the only remaining debt payment you have is the new business loan; as such, you have consolidated all of your business debts into one payment.

How do you know if you need business debt consolidation?

If you have multiple debts to various lenders, you can determine the benefit of business debt consolidation by evaluating your current debts; determining the monthly payment amounts, remaining terms, and interest rates; and comparing those figures with the cost of a new loan. Remember the purpose of debt consolidation is to increase your business cash flow.

Can a small business debt consolidation loan save money?

The goal of a small business debt consolidation loan is to increase your monthly cash flow by reducing your monthly debt payments. While the monthly savings may be nominal, the real savings is compounded by reduced interest rates, which reduce the amount of money that will be paid out over the course of the loan.

Bottom Line

SBA loans are a great option for business consolidation, but they can be difficult to qualify for, require lots of paperwork, and take two to three 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% and 9%, and their long repayment terms of up to 10 years. SmartBiz offers SBA loans of up to $350,000. You can typically qualify if your business has two or more years of history, is profitable, and you personally have at least a 680 credit score. You can pre-qualify in minutes online.

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