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Should You Get A Business Debt Consolidation Loan?

2 Mins read

Owning a business requires keeping many balls in the air at once. Getting your company up and running may have required financing from various sources at various times — and your financial situation may have changed.

As a business owner, the only thing more valuable than your money is your time, so it makes absolute sense to consider how you could streamline your finances — trying to pay the lowest interest rate available on your debts, while making the repayment process as straightforward as possible. This may lead you to wonder: Should you get a business debt consolidation loan?

What Is Business Debt Consolidation?

Using a loan to consolidate business debts functions much like it would for borrowers consolidating their personal debts. If you’re able to qualify for a loan with lower interest than you’re currently paying on your debts now, you can use it to pay down your current debts.

If you’re approved and accept a business consolidation loan, you’ll use those funds to fulfill all your other outstanding debts at once. Then you will focus on making the single, monthly loan payment — the amount of which will depend on factors like the interest rate you get and the loan’s term.

As Bankrate points out, this differs from the process of refinancing because you’re replacing multiple other debts with a new one. When it comes to refinancing, you’re generally just replacing one high-interest debt with another.

Where Can You Get a Consolidation Loan for Business?

There are a few different ways to go about comparing business debt consolidation loan options. Local banks and credit unions often offer consolidation products, as do online-only lenders — particularly for organizations looking for an array of flexible options. The Small Business Administration (SBA) loan guarantee program may be another avenue of funding, although the requirements tend to be rigorous and the application process lengthy.

As Business News Daily notes, borrowers with strong credit and strong company finances are more likely to qualify for approval on consolidation loans from banks or the SBA. Borrowers with less-than-great credit may find more fitting options with “alternative” lenders online.

What to Look for in a Business Consolidation Loan

Here’s the most important rule of thumb to keep in mind: Consolidation loans for businesses are meant to make monthly payments simpler and improve your cash flow by saving you money on interest.

However, there’s no guarantee you’ll automatically reap the benefits if you take out a loan. In fact, you may inadvertently end up paying more interest over time, particularly if you take a loan with a low monthly payment but a long repayment term. It’s also crucial to ensure any of your current loans don’t carry a prohibitively high prepayment penalty that would counteract the possible benefits of the new loan.

The interest rate and loan term are key to evaluating whether or not it makes financial sense to consolidate via a loan. Lenders will heavily consider your credit score and your business’s fiscal performance when deciding whether or not to approve your application and where to set your qualifying interest rate.

Whether or not getting a business consolidation loan is a wise move that will simplify your bookkeeping process and improve your company’s cash flow depends primarily on the interest rate for which you qualify. This in turn depends on factors like your personal credit score and your company’s track record in terms of profitability and longevity. The more research and shopping around you do before choosing a loan, the more likely you are to reap the benefits and avoid the pitfalls.