If your business has a number of outstanding debts, such as business credit cards or unsecured business loans, then a business debt consolidation loan could be what you need to take your business forward. The rise of non-bank lenders and fintechs has boosted the uptake of SMEs using a business loan to consolidate their debt.In this guide, we will explain when business debt consolidation loans are suitable, their advantages and disadvantages, and explore the alternative online lenders that can provide them.
What is a Business Debt Consolidation Loan?
A business debt consolidation loan allows businesses to consolidate multiple debts into a single loan. Ideally, the loan should also come with a lower interest rate and more favourable repayment terms than the business debt it was used to consolidate.
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When are Business Debt Consolidation Loans Suitable?
If your business has multiple high-interest debts, such as credit card debts, outstanding loans, and overdrafts, then it may benefit from a business debt consolidation loan.
Understanding good debt vs bad debt is an important concept. Fundamentally, any debt deemed ‘bad debt’ is likely to benefit from being consolidated and paid off as soon as possible, at the best terms available to your financial profile.
By consolidating multiple debts into a single loan, it should drastically simplify your financial management, and, if you’ve gone about it right, may even reduce your overall debt burden at the same time.
If you can, the goal should be to find a business debt consolidation loan which has more favourable repayment terms than the debt you already owe.
Remember, if you’re taking out a new business loan, with a longer repayment schedule, the total amount of money your business owes may be higher (even if you’ve bagged yourself a better interest rate).
On the flip side, a longer repayment term with lower repayments will help to improve your cash flow and ensure you’ve got the cash at hand to make the most of any opportunities that arise.
Before taking out a new loan to consolidate your business debt, you should also consider if:
Market Conditions Have Improved
Check to see whether your debt is at fixed or variable interest rates. If your existing debt was fixed at a time when interest rates were high, it may be possible to access a more favourable borrowing rate in a low-interest rate environment.
Or, if it’s like the current economic climate in Australia when interest rates are higher, consider if you think they’re likely to go up even further in the future. Depending on your situation, it may be better to fix your debt now.
The Financial Profile of You or Your Business has Improved
If your business has improved its financial performance or credit rating, then naturally you should be eligible for a lower interest rate and there’s a chance your current lenders might be charging you excessive fees based on an old interpretation of your business. You may want to consider your options and either refinance your existing business loan, or consider a new loan to consolidate your debts.
Likewise, some lenders take into account your personal credit score and if your personal finances have improved, you may be able to achieve a better rate than you have in the past.
Advantages of Business Debt Consolidation Loans
If you’re thinking of taking out a business debt consolidation loan then be sure to weigh up the pros and cons of the move before you finalise any decision.
Some of the advantages to consolidating business debt into a single loan include:
Simplified Financial Management
Consolidating a number of debts into just one loan will simplify the financial management of your business. Rather than keeping track of multiple debts with varying interest rates and repayment terms, you can focus on meeting just one repayment schedule.
Lower Interest Rates
A business debt consolidation loan should have a lower interest rate compared to credit cards or other high-interest debts like an overdraft. Saving money on interest will help to reduce your overall debt burden.
Improved Cash Flow
If you’ve managed to lower your weekly or monthly repayments, you’ll have more money to invest in the growth of your business operations.
Protect Your Credit Score
If your business has multiple repayments coming out of your account then it can be easy to miss a payment. Even if you’ve set up a direct debit you may lose track of your repayments and forget to transfer enough money into your everyday account to cover it. If you miss a loan repayment, you’ll likely incur additional fees. What’s more, it could even impact your credit score if you’re consistently missing payments.
By consolidating a number of debts into a single loan, businesses can reduce the risk of missed payments and protect their credit score.
Disadvantages of Business Debt Consolidation Loans
As always, there are some potential concerns you’ll want to consider too. Some of the disadvantages of business debt consolidation loans include:
Chance of Additional Fees
The business debt consolidation loan you’re taking out will often be accompanied by additional fees, such as an origination fee (usually 2-3% of the total amount). Plus, some of your existing business debt may have early prepayment penalties.
Be sure to fully understand the fees that are involved in both closing your existing loans and on the new loan you’re taking out.
Remember, you can claim back the interest which is due on most business loans with the ATO – see our guide to business tax debt / ATO loans.
Potential for Increased Debt
Consolidating debt will simplify your financial management but you may also be taking on more debt than you had before.
If you’re using a loan to clear revolving facilities like a credit card or overdraft, resist the temptation to redraw on these facilities after you’ve taken out a business debt consolidation loan.
Limited Eligibility
Business debt consolidation loans may not be available to all businesses. Banks in particular will be less likely to approve your request (more on this below). To qualify, you’ll need to be able to demonstrate affordability and a clear repayment plan. If you have a chequered credit history, see our guide to bad credit business loans.
Online Lenders Offering Debt Consolidation Loans for Business
It can be difficult to qualify for a debt consolidation loan from a bank, particularly as an SME. If you have a number of existing debts with one bank, you may be eligible to consolidate these under one loan with the same bank. In this scenario, the interest rate on your new loan is probably going to be much the same as your existing debt. The main benefit here is simplifying your loan repayments and cutting out unnecessary hassle.
Online lenders often have less stringent eligibility requirements and can offer fast approval, followed by funding in 24 hours.
But be aware, online lenders typically charge higher interest rates than banks. The reason for this is twofold; not only do they offer a superior service, they’re often prepared to take on more risk. It’s important to do your research and compare loan options carefully to ensure that you are getting the best terms and interest rates.
These are just a handful of the online lenders who are happy to issue business debt consolidation loans namely
If your business has multiple debts, it’s worth evaluating whether a business debt consolidation loan is right for your business. The loan is guaranteed to simplify your financial management but you’ll need to weigh up whether the finances make sense. Consider if your cash flow will be improved and whether or not your overall debt burden will be increased. Depending on what you’re looking to achieve, a business debt consolidation loan might be what’s needed to drive your business forward. Always consider a broad range of banks and online lenders to ensure you’re getting the best loan terms and interest rates for your financial situation.
