Consolidate Business Debt: Pros And Cons Of Debt Consolidation

Loans for a small business are often an extremely important part of building a thriving enterprise. Funds can be used for many purposes including working capital, equipment, hiring, and even purchasing commercial real estate.

There’s another valuable way a low-cost loan can help stabilize and grow your business – debt consolidation. Here are pros and cons of using a debt consolidation strategy successfully.

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What is debt consolidation?

In short, business debt consolidation is the combining of several forms of debt into one new loan with a single, streamlined monthly repayment. This debt could consist of outstanding small business loans, such as lines of credit and bank term loans. Consolidating business debt can make repaying business debt more manageable, more affordable, and easier. While consolidation refers to the merging of multiple loans into a single new loan, refinancing only requires a single loan that can be paid off and replaced with another loan at a lower interest rate.

Business debt consolidation options

If you’ve decided that a business consolidation loan makes good financial sense, there are a few routes you can explore.

Bank loan

A bank is often the first place small business owners consider when exploring loan options.

If your business needs funds more quickly than an SBA loan, consider applying for a bank term loan. SmartBiz currently offers term loans through its bank partners for debt refinance as well as for working capital, business expansion and new equipment purchases. The details include:

  • $30,000 to $500,000 loan amounts
  • 2 – 5 year repayment terms
  • Fixed interest rate*
  • Monthly repayments
  • No pre-payment penalties

*Interest rate depends on loan term and the applicant's credit and financial profile.

Learn more here about Bank Term loans available through the SmartBiz bank network: Bank Term Loans.

SBA (Small Business Administration) loans

The aim of the SBA is to support small businesses across the U.S. In addition to educational programs and mentorship opportunities, the SBA has a variety loan options. Low-cost SBA 7(a) loans are frequently used for debt consolidation.

If you qualify, the Small Business Administration’s low-cost loan programs can be the best option. SBA loans have low rates, long terms, and very low monthly payments to fuel stability, growth, and savings.

You can use funds from a 7(a) loan in a variety of ways including:

Working Capital – Purchase equipment, increase inventory, add marketing programs, use for operating expenses, and to hire additional staff.

Debt Consolidation Loans – Refinance merchant cash advances, short-term business loans, high interest business loans, daily or weekly payment loans, or business credit cards.

Commercial Real Estate – Refinance an existing commercial real estate mortgage or buy an office building (or other owner-occupied commercial space).

For in-depth information about the popular SBA 7(a) loan program, visit the SmartBiz Small Business blog and review our comprehensive article: What is an SBA Loan?

Online lenders

There are countless online lenders you can turn to. Online lenders often offer a truncated application process and fast funding - but buyer beware. Rates can be high with short terms. If you get into an expensive loan, they can cause more harm than good. There are benefits to working with an online lender. Review Small Loans Online for Business Owners and learn about the benefits and drawbacks.

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Pros of Debt Consolidation

No matter which debt consolidation strategy you might use, if the new loan helps you better manage cash flow and decreases the amount of interest you pay each month, it’s probably a good business decision.

Though getting a new loan involves applying, supplying financial paperwork, and having a strong credit score, it can have definite advantages like:

  • One payment instead of several
  • Terms for payback can be shortened
  • Interest rates are likely to decrease
  • Cash flow stabilized
  • Debt paid down more quickly

Money saved can be used to expand your business so you can hire and pay yourself and your employees more.
SmartBiz customer Milton Martinez, owner of Triple D Towing, was struggling to make payments on two expensive daily payment loans. A low-cost SBA 7(a) loan to consolidate that debt was the solution. He says, “I’m saving $15,000 - $18,000 dollars. That’s money I can put back into growing my business or into savings.”

Cons of Debt Consolidation

A debt consolidation strategy for one business could pose disadvantages for others. Explore these details before you start the loan process.

  • Consolidation can be good for a growing business. However, if cash flow declines, you might have trouble making payments.
  • Debt consolidation can be a temporary solution to a permanent problem. It doesn’t remedy the problem of your business is spending more money than it’s taking in.
  • Paying more interest over time. When you take out a new loan to replace old loans, your loan terms start over. That means you may spend more time paying off your loan, and you’ll likely pay more total interest in the long term.

The bottom line

Debt consolidation can be an efficient way to pay off your small business debt and avoid crunching your cash flow. But before you pick this strategy to tackle existing debts, make sure to weigh all the pros and cons.

If you work with a bookkeeper, accountant, or other financial professional, ask them for insight and guidance as well.

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