Small Business Debt Consolidation

Why small businesses accumulate multiple debts

Understanding how businesses end up with multiple debts helps explain why consolidation becomes necessary. Small businesses typically accumulate various debts through the natural course of operations and growth.

• Credit cards are relatively easy to obtain and offer immediate purchasing power. As the business grows, they might take out equipment loans to purchase necessary machinery or vehicles. Seasonal businesses often rely on lines of credit to manage cash flow during slower periods. When traditional financing proves difficult to obtain, some turn to merchant cash advances or alternative lenders, which can carry significantly higher costs.

• Expansion efforts frequently require additional capital, leading businesses to layer new debt on top of existing obligations. A retail store might have a loan for initial inventory, another for renovations, a business credit card for supplies, and a merchant cash advance to bridge a cash flow gap. Before long, the owner is managing four or five different payments with varying interest rates, due dates, and terms.

• Economic downturns or unexpected challenges can also force businesses to take on multiple debts quickly. During the COVID-19 pandemic, for instance, many businesses took advantage of emergency loans, grants, and credit facilities while still carrying pre-existing debt. When circumstances stabilize, they’re left managing a complex web of financial obligations.

Types of debt that can be consolidated

Small business debt consolidation can encompass various types of business obligations, though not all debts are equally suitable for consolidation.

• Business credit card debt represents one of the most common types included in consolidation. These cards often carry high interest rates, sometimes exceeding 20% APR, making them expensive forms of financing to maintain long-term. Consolidating multiple business credit cards into a single lower-interest loan can generate substantial savings.

• Term loans from banks or online lenders can be consolidated if the business qualifies for a new loan with better terms. This might make sense if interest rates have dropped since the original loans were taken out or if the business’s creditworthiness has improved significantly.

• Merchant cash advances are frequently targets for consolidation because they typically carry the highest costs of any business financing. These advances, which provide upfront capital in exchange for a percentage of future sales, can have effective annual percentage rates exceeding 50% or even 100%. Consolidating these into traditional loans can dramatically reduce financing costs.

• Lines of credit, equipment loans, and invoice factoring arrangements can also be included in debt consolidation efforts. However, business owners should carefully evaluate prepayment penalties on existing loans, as these fees might offset the benefits of consolidation.

Certain debts generally shouldn’t be consolidated:

• SBA loans often have favorable terms and strict usage requirements that make consolidation inadvisable.

• Personal guarantees and debts that serve as collateral for specific assets require careful consideration before consolidation.

• Tax debts and legal judgments typically cannot be consolidated through standard business loan products and require specialized arrangements.

Benefits of consolidating business debt

Small business debt consolidation offers numerous advantages that extend beyond simple convenience.

• Simplified cash flow management. Instead of tracking multiple payment dates, amounts, and account logins, business owners make a single monthly payment. This reduces the administrative burden and minimizes the risk of missed payments that can damage credit scores and trigger late fees.

• Potential interest savings represent another significant advantage. If a business can consolidate high-interest debts into a loan with a lower rate, the total cost of borrowing decreases. For example, consolidating three credit cards with interest rates of 18%, 22%, and 24% into a term loan at 12% would generate substantial savings over the loan’s life, assuming no prepayment penalties on the cards.

• Improved cash flow often results from consolidation, particularly if the new loan extends the repayment period. While this means paying more interest over time, the lower monthly payment can provide breathing room for businesses struggling to meet current obligations. This improved cash flow can be redirected toward business growth, building emergency reserves, or other strategic priorities.

• Credit score improvement is possible through consolidation, though not guaranteed. Paying off credit cards reduces credit utilization ratios, a key factor in credit scoring. Making consistent on-time payments on the consolidation loan demonstrates creditworthiness. However, opening a new credit account initially causes a small, temporary drop in credit scores.

• Psychological benefits shouldn’t be underestimated. The mental burden of managing multiple debts creates stress that affects decision-making and overall business performance. Consolidation provides clarity and a clear path to becoming debt-free, which can improve both the owner’s well-being and business focus.

• Fixed repayment schedules offer predictability that variable-rate debts and merchant cash advances don’t provide. Knowing exactly when the debt will be paid off allows for better long-term planning and creates light at the end of the tunnel.

Potential drawbacks and considerations

Despite its benefits, small business debt consolidation isn’t always the best solution and comes with potential disadvantages.

• Extended repayment terms, while lowering monthly payments, typically increase the total interest paid over the loan’s life. A business might pay thousands more in interest by stretching a three-year debt into a seven-year consolidation loan, even with a lower interest rate.

• Qualification requirements can be stringent. Lenders offering consolidation loans typically require good credit scores, solid business revenue, and acceptable debt-to-income ratios. Businesses struggling with debt may find it difficult to qualify for consolidation loans with favorable terms, potentially forcing them toward less advantageous options.

• Collateral requirements pose another challenge. Many consolidation loans are secured, meaning they require collateral such as business assets, inventory, or even personal assets. This puts additional property at risk if the business cannot make payments on the consolidated loan.

• The temptation to accumulate new debt represents a behavioral risk. After consolidating and paying off credit cards, some business owners run up new balances on those now-available credit lines. This results in even more debt than before consolidation, creating a worse financial situation.

• Prepayment penalties on existing loans can make consolidation expensive or impractical. Some lenders charge substantial fees for paying off loans early, which might negate the savings from consolidation. Business owners must calculate whether the benefits outweigh these costs.

• Personal guarantees are commonly required for small business consolidation loans, particularly for businesses without extensive operating history or substantial assets. This puts the owner’s personal finances at risk if the business cannot repay the consolidated debt.

Options for consolidating small business debt

Several pathways exist for consolidating business debt, each with distinct characteristics, requirements, and suitability for different situations.

• Traditional business term loans from banks or credit unions offer some of the most favorable consolidation terms for qualified businesses. These loans provide a lump sum upfront with fixed monthly payments over a set period, typically ranging from one to ten years. Interest rates for businesses with strong credit can range from 6% to 15%. However, traditional banks have strict qualification requirements, including multiple years in business, strong revenue, good credit scores, and often collateral.

• Online business lenders have emerged as alternatives to traditional banks, offering faster approval processes and more flexible qualification criteria. Companies like OnDeck, Kabbage, and Funding Circle provide consolidation loans to businesses that might not qualify for bank financing. The tradeoff is typically higher interest rates, ranging from 10% to 40% or more, depending on the business’s financial profile.

• Business lines of credit offer flexibility for consolidation, allowing businesses to draw funds as needed to pay off other debts while only paying interest on the amount used. This option works well for businesses with fluctuating cash flow needs. However, lines of credit typically carry variable interest rates and may require periodic renewal.

• SBA 7(a) loans can be used for debt refinancing under certain circumstances, including when the debt being refinanced was used for business purposes and refinancing improves the business’s cash flow. These government-guaranteed loans offer favorable terms, with interest rates typically ranging from 9% to 13% and repayment terms up to 25 years for real estate or 10 years for other purposes. The application process is lengthy and requires substantial documentation.

• Business debt consolidation loans are specific products designed for consolidation purposes. Some specialized lenders focus exclusively on helping businesses consolidate debt, offering streamlined applications and consideration of the benefits consolidation will bring to the business’s financial health.

• Balance transfer business credit cards present another option for consolidating business credit card debt Some business credit cards offer promotional 0% APR periods on balance transfers, typically lasting 6 to 18 months. This allows businesses to pay down principal without accruing interest, though balance transfer fees of 3% to 5% usually apply.

• Merchant cash advance consolidation programs have emerged in response to the growing number of businesses trapped in expensive MCA cycles. These specialized programs refinance merchant cash advances into more traditional loan structures with lower costs, though they may still carry higher interest rates than standard business loans.

Qualification requirements

Understanding what lenders look for helps business owners determine whether consolidation is realistic and how to improve their chances of approval.

• Credit score requirements vary by lender and loan type, but most consolidation loans require minimum credit scores between 600 and 680. Traditional banks typically require scores of 680 or higher, while online lenders may work with scores as low as 600 or even 550 for specialized products. Higher credit scores qualify for better interest rates and terms.

• Time in business matters significantly. Most lenders prefer businesses operating for at least one year, with many requiring two years or more. Newer businesses may struggle to qualify for favorable consolidation terms unless they have exceptional revenue or the owner has substantial personal assets.

• Revenue requirements ensure the business can afford the consolidated loan payment. Minimum annual revenue requirements range from $50,000 to $250,000 depending on the lender and loan amount. Lenders examine bank statements to verify consistent revenue and assess cash flow patterns.

• Debt-to-income ratios help lenders evaluate whether adding the consolidation loan creates an unsustainable debt burden. While acceptable ratios vary, most lenders prefer business debt service coverage ratios of at least 1.25, meaning the business generates $1.25 in cash flow for every dollar of debt service required.

• Collateral may be required, particularly for larger consolidation loans. Acceptable collateral includes business assets like equipment, inventory, and accounts receivable, as well as real estate. Some lenders offer unsecured consolidation loans to well-qualified businesses, though these typically carry higher interest rates.

• Personal guarantees are nearly universal for small business consolidation loans. This means the business owner personally assumes responsibility for repayment if the business cannot pay, putting personal assets at risk.

Making the right decision for your small business

Determining whether to consolidate requires honest assessment of your business’s financial situation and disciplined evaluation of available options.

Consolidation makes sense when:

• You’re managing multiple high-interest debts that are difficult to track
• You can qualify for a consolidation loan with a lower overall cost than existing debts
• When improved cash flow would meaningfully benefit business operations
• When simplification would reduce stress and improve focus

Consolidation probably isn’t right when:

• Existing debts have favorable terms that would be difficult to improve upon
• Prepayment penalties outweigh consolidation benefits
• You don’t qualify for terms better than your current debts
• When underlying spending problems haven’t been addressed

The bottom line

Before consolidating, address the root causes of debt accumulation. If debt resulted from overspending, inefficient operations, or lack of financial planning, consolidation provides only temporary relief unless these issues are resolved. Create a realistic budget, improve financial tracking, and develop sustainable spending habits.

After consolidating, commit to not accumulating new debt on paid-off credit lines. Consider reducing credit limits or closing accounts if you’re concerned about self-discipline. Redirect the money saved through consolidation toward building an emergency fund, investing in growth, or accelerating debt repayment.

Ultimately, the goal isn’t just to consolidate debt but to build a financially healthy business that generates sufficient cash flow to meet its obligations, invest in growth, and provide financial security for its owner. Debt consolidation can be a valuable tool in achieving that goal, but only when used wisely and as part of a comprehensive financial strategy.

There’s always JG Wentworth…

Do you have $10,000 or more in unsecured debt? If so, there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include: 

• One monthly program payment 

• We negotiate on your behalf 

• Average debt resolution in as little as 48-60 months 

• We only get paid when we settle your debt  

If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?