Jul 14, 2020

How to Consolidate Business Loans

What do you think of when you hear “business debt consolidation”? Are you looking to consolidate business credit card debt? Or have you taken out more than one business loan in a way that now prevents you from securing other forms of financing? The best course of action for consolidating your debt will depend on what your business needs (for that reason, it’s always best to talk to an expert), but there are a couple of guidelines.

What to Know About Consolidating Business Credit Card Debt

When most people think of consolidating business debt, the first thing they think of is credit card debt. Credit card debt is one of the most common avenues for personal debt consolidation, so it makes sense that it would come to mind—but it’s important to understand where personal debt and business debt differ. 

Business loans, by their nature, are risky for lenders. As a result, they tend to come with higher interest rates. As a result, refinancing business credit card debt into another business loan product won’t necessarily give you lower rates—and this business loan type is often the hardest to consolidate. Your best bet for consolidating business credit card debt will be to use another business credit card—either moving everything onto one card, so you only have one bill to worry about paying each month or opening a 0% introductory APR card. However, it will be harder to secure either of these options if you’ve fallen behind on existing payments. 

What to Know About Consolidating Business Loan Debt

Some small business owners find themselves in tricky spots once they’ve taken out a second position—financial speak for a second loan—only to realize that it violates the terms of their second loan. As a result, borrowers can find they’re unable to access other means of capital and that the act of taking out multiple loans at a time, known as loan stacking, has hurt their credit. In this situation, consolidating business debt into a single loan can be enormously beneficial for a small business. 

Alternatively, you may find that you have the wrong business loan for your needs. Maybe you took out a business term loan for a piece of equipment when equipment financing would have better suited your situation.

How Consolidating Business Debt is Different From Consolidating Personal Debt

There are 2 primary ways that business debt consolidation differs from personal debt. The first, as we already touched on, is that because business loans are riskier for investors, you won’t necessarily get a lower rate by refinancing credit card debt into another product. The second way business debt differs is in regards to the loan term (the length of the loan). With personal debt, the general approach is to seek out the longest term available so you have a manageable monthly payment with a lower interest rate. 

Many small business owners assume that’s the best practice for business loans, too, but a longer loan term is not always ideal. Here’s why: once you have a longer loan term, you’re locked into that term. If you take out a 3-year loan, you won’t be able to take out another loan if you find you need more capital 6 months later. Because businesses generate income at a higher, quicker rate than individuals tend to, small businesses typically benefit from loans with shorter terms (even if they come with higher interest rates) because they can repay quickly, and then they’re free to secure more capital a few months later when they need it. 

How a Small Business Debt Consolidation Loan Can Help

If you have more than one business loan, consolidating your business loans will help you improve your business credit score. It will also make it easier to access more working capital in the future. If you have the wrong loan type for your business needs, transferring that loan can help you secure terms that are better aligned with your business goals. 

What to Look for in a Business Debt Consolidation Loan

Here are a couple of general rules of thumb: ask yourself what you’re using the capital for. Did you need it to purchase inventory and you’ve already seen a return on that investment? You may want to look for a loan with a shorter term, allowing you to turn over the loan more quickly. Prioritize terms that will increase your business’s agility and flexibility. For specific ways that a debt consolidation loan can help your business, we recommend talking to a business loan expert. 

What to Avoid in a Business Debt Consolidation Loan

Avoid getting hung up on the annual percentage rate (APR) for the loan. APR is typically less important for business loans because businesses have higher margins. Usually, small businesses are seeking financing for payroll, inventory, or an upcoming job. Most of the time, borrowers don’t need the capital for more than 3–6 months. When you prioritize APR above all else, you may end up locked into a loan with a longer term, which in turn may prevent you from taking advantage of other opportunities down the road. 

About the author

Mary Kate Miller
Mary Kate Miller
Mary Kate Miller is a writer based in Chicago, IL. She specializes in covering finance (personal and business), investing, and real estate. Her mission in life is to give readers the confidence and the knowledge needed to grow their wealth by making financial topics more accessible. When she's not writing about topics like business loans, you can find her playing armchair financial advisor to the Real Housewives.

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