When you’re struggling to repay your business debt, it can feel like there’s no way out. If you find yourself in this situation, it’s easy to feel overwhelmed, and like there’s no way out. Many small business owners turn to business debt consolidation, which can give them the breathing room they need to run the business more effectively. However, it’s not a one-size-fits-all solution to working through business debt. It’s important to understand how business debt consolidation works and some of the potential downsides.
What Is Business Debt Consolidation?
Business debt consolidation is the process of combining multiple business debts into just one loan. It helps to streamline your business debt repayment, allowing you to have just one monthly payment. It may also allow you to save money on your business debt, especially if you can get a lower interest rate on your loan.
How Debt Consolidation Works
When you consolidate your business debt, you would apply for one large business loan — ideally a term loan — and use it to pay off multiple other business debts. You can use a business consolidation loan to pay off business credit cards, business loans, lines of credit, equipment financing, MCA, merchant advances and more.
Rather than continuing to make payments on your original debts, you would only have to make payments on your new loan. The new loan may be from one of your original lenders or a new lender entirely.
Common Reasons Businesses Consolidate Debt
Consolidating your business debt can have some key advantages, which is why it’s a popular choice with small business owners.
First, debt consolidation helps to simplify your debt repayment. For example, you might have a couple of business credit cards and a business loan, meaning you’re making multiple debt payments each month. That can cause a cash flow crunch and can increase your chances of missing a payment. When you consolidate your debts, you have just one payment to worry about.
Debt consolidation can also help you save the business money. A lower interest rate on the business debt, may lower your monthly payment, help pay off your debt more quickly, and reduce the amount of interest you pay in the long run. This can create more cash flow to keep in your business to put toward other priorities.
Finally, business debt consolidation could help you improve your business credit by reducing your credit utilization and making it easier to pay your bills on time in the long run while requesting reporting to business credit.
Disadvantages of Business Debt Consolidation
Though business debt consolidation certainly has some perks, there are also some disadvantages to consider. For some small business owners, these disadvantages could be enough to consider alternatives to taking on more debt. Here are some downsides of debt consolidation:
- Potentially Higher Costs: Depending on your situation, debt consolidation could cost you more money in the long run, especially if it results in a higher interest rate, more long-term interest payments, hidden fees, or prepayment penalties.
- Longer Repayment Terms: Debt consolidation may stretch out your repayment term. While this has the advantage of a lower monthly payment, it also means you’ll be paying on your debt longer and could ultimately pay more in interest.
- Possible Credit Score Impact: Borrowing a debt consolidation loan can negatively impact your personal and/or business credit score, especially in the short term. The new loan will result in a hard inquiry in your credit report, as well as a new debt account.
- Doesn’t Solve Underlying Financial Problems: A business debt consolidation loan won’t solve any of the financial issues that caused your overwhelming debt in the first place or cash flow issues. Cash flow strain related to slow paying clients or loss of business may still plague the business and may even have more strain. You’ll also be subject to new financial risks when taking on new debt.
- Must Meet Qualification Criteria: When you apply for a debt consolidation loan, you’ll have to meet qualification criteria. And if you or your business don’t have a strong credit history, your loan application could be denied or you could be subject to high interest rates. You could also end up needing to provide collateral.
- Over-Reliance on Borrowing: If your goal is to get out of debt, a debt consolidation loan isn’t not always the best route. It could simply continue your overreliance on borrowing and factoring, especially if the new loan extends your repayment term.
Red Flags and Pitfalls to Watch Out For
Though debt consolidation has some potential downsides, there are also some good reasons why business owners pursue it. If you decide business debt consolidation is right for you, there are some red flags to watch out for to make sure you get the best loan.
First, read the fine print on your new loan carefully to make sure the terms are actually better than what you have now. Many people think of debt consolidation as a magic pill that will fix their business finances. But if the new loan extends your repayment term or comes with higher interest and fees, or has prepayment penalties you’ll do just the opposite.
You should also be wary of choosing the wrong financial institution. Avoid lenders that make misleading promises — for example, those that guarantee loan approval before you’ve even applied — and vague loan terms or guarantees of more funding if you take an initial loan with them. The loan terms should be clearly stated so you know exactly what you’re agreeing to.
Scammers often try to take advantage of people including businesses in vulnerable financial situations, including those struggling with their debt. It’s important to carefully vet any potential lenders to make sure they’re legitimate and reputable and offer the terms that make sense for your business.
Alternatives to Business Debt Consolidation
If you aren’t sure if debt consolidation is right for your business — or if you don’t qualify for a debt consolidation loan — there are a few alternatives you may consider.
Refinancing Loans with Better Terms
Debt refinancing is a similar process to debt consolidation. While the terms are sometimes used interchangeably, they’re slightly different. Debt consolidation involves combining multiple debts into a single loan. Debt refinancing simply means taking out a new loan to replace an existing loans or accounts. The purpose of refinancing is typically to get a lower rate or more favorable terms, which will make it easier and cheaper to repay your loan.
Negotiating Directly with Creditors
If you’re unable to pay your debt as it is, it may be worth renegotiating with your creditors to settle your debt. Sometimes, lenders are willing to settle for a lower amount (usually as a lump sum payment) to ensure they can recover at least some of the outstanding debt but not without showing a hardship which is often linked to delinquency. Lenders may be most likely to settle when you’re already behind on your monthly payments, but it may be worth a shot even if you aren’t to see if you can rework the terms to stay current.
Working with a Debt Relief Attorney to Settle Debt
A final alternative is to enlist the help of a business debt relief attorney. Some business owners choose to attempt to settle with their creditors themselves, while others work with debt settlement companies. But often, the best results come from working with an experienced attorney who can guide you and your business through the complexities in resolving and reworking business debt.
Experienced business debt relief attorneys typically have years of experience negotiating with business lenders including advance companies where they understand the ins and outs and legalities that could impact the business during the process. Additionally, if you’re unable to reach a settlement agreement and your lender ends up taking legal action against you, your business debt attorney can advocate for you and the business.
Conclusion
Debt consolidation is one possible tool in the toolbox to help business owners manage their debt. The process can help simplify your debt repayment and, in the best-case scenario, help you save money on your debt.
However, as with other financial decisions, it’s important to consider both the advantages and disadvantages carefully. If you decide to go the debt consolidation route, make sure to vet your lender and run the numbers carefully. And if you need alternatives, consider working with a debt relief attorney.
Here at Tayne Law Group, our experienced business debt relief attorneys have decades of experience helping business owners like you manage their debt. Whether you’re ready to hire an attorney or just looking to explore your options, we may be able to help. Call us at for a free no obligation phone call with a team member at (866) 890-7337 or fill out our short contact form to speak with someone on our team and talk through your next steps. We never sell or share your information; all discussions with our experienced debt help team are confidential.
