Should You Consolidate Business Debts?

Business man pulling the weight of debt

Business loans are terrific for turning expansion dreams into reality or paying expenses in a lull, but they can also become a drag if they’re hard to repay or carry high annual interest rates.

Like consumers with an assortment of credit card debts, businesses with multiple loans can face tricky payment decisions that can be a burden on operations. For many, the solution is loan consolidation, restructuring debt to lower interest payments and combine a folder full of loans into a single payment.

How to Consolidate Business Debts

Small businesses often take loans to fund operations. Instead of using a single credit line, they often use multiple loans taken over time to cover expenses, opting to make minimum payments in order to keep margins high. That can be a problem as loans pile up and become increasingly difficult to manage.

Consolidation loans that streamline repayment at lower interest rates, could become a solution to the problem.

To consolidate, business owners take out a single loan which they use to pay off smaller loans that are outstanding. A single loan simplifies planning and should reduce costs. You are trading a patchwork of payments for a single, predictable payment. Better still, a consolidated loan might have an extended repayment period, meaning your can make smaller payments stretched over a longer time.

Before moving forward, review any prepayment penalties you might have to pay your current lenders and review the fees you might have to pay a new lender. Also compare the annual percentage rate of all your loans to decide how to proceed. If you can replace several high interest rate loans with a lower rate on a consolidated loan, it should be a good choice. But if you have debts that have lower APRs than the consolidated loan, you probably won’t want to include them in the consolidation scheme.

Community and national banks are a common source of business debt financing, but there are other alternatives. The U.S. Small Business Administration offers the lowest rates for loans as large as $350,000, but other lenders such as Funding Circle, DealStruck, Fundation and Credibility Capital also loan money, often at higher rates with higher credit score requirements.

Business Debt Consolidation vs. Refinancing

Debt consolidation and debt refinancing are very similar, and the terms are often used interchangeably, but there are differences. Consolidation refers to the merging of multiple loans into a single new loan, while refinancing only requires a single loan that can be paid off and replaced with a single loan at a lower interest rate.

Though the two approaches are similar, consolidation is often used to simplify repayment, turning a variety of loans with an assortment of repayment rules into one easy-to-understand payment. Refinancing is almost always about getting better terms – a lower interest rate and a longer repayment period.

Advantages of Small Business Debt Consolidation

No matter which debt restructuring strategy you might use, if the new loan helps you better manage cash flow and decreases the amount of interest you must pay each month, it might be a worthwhile step to take.

Though getting a new loan can involve effort – you’ll need to apply, present information about the strength of your business operations and overall debt and answer questions a lender might have – it can have definite advantages.

  • You will be dealing with a single creditor instead of several
  • Your interest rates are likely to decrease.
  • You can shop for better repayment terms which can cut your fixed expenses.
  • You can use the money you save to expand your business or pay yourself and your employees more.

If you have unsecured business loans with high interest rates, you might consider a secured consolidated loan that uses business assets as collateral. For instance, if you are manufacturing something and have equipment that has resale value, a lender might accept the equipment as collateral and offer a loan with a lower interest rate than you were paying on your unsecured debt.

Disadvantages of Small Business Debt Consolidation

What might look like advantages to debt consolidation for one business could pose disadvantages for others. A consolidated loan with a fixed interest rate could be very good if your business is growing and you have the cash flow to pay down the debt at an accelerated rate.

However, if your business is struggling and your cash flow could decline, a new loan might not do much good.

Before consolidating or refinancing debt, you should carefully consider the benefits and liabilities. A new loan with a longer repayment schedule might lower monthly payments but stretch the number of months you’ll be paying interest. Unless the new loan results in overall lower monthly interest payments, it effectively might be moving debt from multiple accounts into a single one, a tactic that might save little or nothing.

Other Business Debt Relief Options

Many times, merely consolidating debt or refinancing it doesn’t save enough to keep a business going. If a business is making less and less money month after month, the modest savings that can be gained for reorganizing debt won’t cut it.

There are alternatives, including selling the business, liquidating assets and making efforts to collect debts from customers more quickly. A business can also try to pay suppliers more slowly, though that might be difficult to arrange. If you can offer incentives to customers, like discounts for accelerated payments, you might get good results.

Business owners can also try settling their debts with creditors. This technique might work for a small business or sole proprietorship if the owner has used personal credit facilities to fund business operations. If you wonder how the process might work for your business, consider contacting a nonprofit debt counselor or a debt management firm.

Bankruptcy is the final alternative. There are several routes to reduce or eliminate debt through the federal bankruptcy code. Two options, Chapter 11 and Chapter 13, are restructuring programs. Chapter 13 bankruptcy is usually only available to sole proprietorships and comes with limits on how much debt you can have in order to file. Chapter 11 bankruptcy is a more common form of business bankruptcy. Both allow you to restructure debt and pay creditors less than you originally owed under a plan approved by a bankruptcy judge. In many cases, you might need to sell business assets to satisfy part of the debt.

Chapter 7 is the most extreme form of bankruptcy, requiring that you liquidate your business and repay part of what you owe creditors.

If your business emerges from either Chapter 11 or Chapter 13 bankruptcy, it is likely to face obstacles that might prove ruinous. Your business’ credit score will drop precipitously, and you might find that you can’t borrow money or obtain a credit line. Even if you can borrow, the interest rates might be very high.

Sources

Hecht, J. (2018, September 20) Refinancing vs. Consolidating Business Debt – What’s the Difference? Retrieved from: https://www.forbes.com/sites/jaredhecht/2018/09/20/refinancing-vs-consolidating-business-debt-whats-the-difference/#670884336a0d

Zimmerman, J. (2019, March 13) Poor Cash Flow? Consolidate Your Business Debt, Retrieved from: https://www.nerdwallet.com/blog/small-business/refinancing-business-debt-consolidation/

Pell, N. (2019, March 11) Four Options for Business Debt Consolidation and Refinancing. Retrieved from: https://www.thesimpledollar.com/loans/blog/business-debt-consolidation-and-refinancing/

About the author

Joey Johnston has more than 30 years of experience as a journalist with the Tampa Tribune and St. Petersburg Times. He has won a dozen national writing awards and his work has appeared in the New York Times, Washington Post, Sports Illustrated and People Magazine. He started writing for InCharge Debt Solutions in 2016.