What is business debt consolidation?
Business debt consolidation involves combining multiple debts into a single loan with one monthly repayment. It’s an effective way of simplifying financial management, lowering monthly payments, and securing better terms or lower interest rates.
How does debt consolidation work?
Business debt consolidation works by replacing several existing debts with a single, new business loan with a fixed interest rate and a structured repayment plan.
For example, suppose a business has a few expensive types of borrowing, like a business credit card, an overdraft, and a short-term loan. In that case, it can use a debt consolidation loan to repay all of those existing balances.
From then on, they deal with just one lender, one monthly payment, and one set of terms. Assuming the interest rate and fees are lower than the previous debt, it will also save the business money.
What types of business debt consolidation loans are available?
There are typically two main types of business debt consolidation loans:
Secured business consolidation loans
A secured business loan is backed by a UK property. Because the lender has security in place, these loans usually come with lower interest rates and longer repayment terms. However, if you cannot repay the loan, the lender can use the security to recover the balance they’re owed.
Secured loans are often used by businesses with valuable properties or those looking to consolidate larger amounts of debt over a longer period.
Unsecured business consolidation loans
Unsecured business loans don’t require any collateral. Approval is typically based on your business’s financial health, trading history, and credit profile.
These loans can be faster to arrange but may come with higher interest rates and shorter repayment terms than secured options. Unsecured business consolidation loans are a good option for small businesses that don’t have the required assets to use as collateral.
How does debt refinancing differ from consolidation?
The terms debt consolidation and debt refinancing are often used interchangeably. While both can help manage borrowing more effectively, they refer to two different approaches.
Commercial debt consolidation is about combining multiple debts into a single loan. It simplifies your repayments into one monthly payment and one fixed repayment plan to manage.
Debt refinancing is when you replace a single existing loan with a new one to get better terms. This might mean switching to a new lender offering a lower interest rate or extending the repayment period to ease cash flow pressures.
The new lender pays off the existing debt and issues a replacement loan. The structure remains similar, but the cost and duration of the loan are usually improved.
Benefits of business debt consolidation loans
Consolidating expensive business debts into one more affordable payment comes with a number of benefits, including:
Reduced APR
When consolidating your business debt, you’re moving all your debt into one repayment. By making sure your terms are better than your current average for all debts, you can reduce your overall APR.
This is nearly always guaranteed when refinancing short-term loans, as these typically feature higher rates than longer-term debt consolidation loans.
Lower monthly payments
Because debt consolidation loans typically have lower APR rates and longer terms than most other business loans, you’ll pay less per month.
You need to remember that you’ll likely be paying off your debt for longer, but if cash flow is a constant struggle for your business, debt refinancing or consolidation may be the answer.
Additional borrowing
As you’ll be paying less per month, you can potentially acquire extra funding when consolidating current debts.
This will be judged on a case-by-case basis, and it may not be advisable to take on extra credit after consolidating your existing debts.
If you have bad credit and you’re looking for further borrowing, it may be worth considering CCJ loans for business.
Easier cash flow management
Managing a single loan is much easier than managing several debts that require payments, potentially on different dates and from different accounts.
In addition to streamlining your payments into one easy-to-manage account, you’ll also pay less, increasing your cash flow and helping your business function as it needs to.
Increased revolving credit
If part of your existing borrowing includes a business credit card or a revolving credit facility, consolidating that balance could free up available credit.
This gives your business more flexibility for managing unexpected costs or short-term expenses, without taking out further loans.
How to get a business debt consolidation loan
Here are the steps to follow when you’re looking to get a debt consolidation loan for your business:
- Assess your debts: List all current debts, interest rates, and terms.
- Review your credit profile: Understand your current business credit score.
- Gather financial documents: Prepare business accounts, tax returns, and bank statements.
- Compare funding options: Complete our straightforward online form to find and compare loans.
- Complete the application: Apply for the business consolidation loan that best suits your business and situation.
Is a debt consolidation loan right for your business?
A debt consolidation loan could be a good fit for your business if:
- You’re juggling multiple repayments: Combining your debts into one can simplify your finances and reduce the risk of missing any payments.
- You’re paying high interest rates: Consolidating could help you lock in a lower, fixed rate, especially if your business qualifies for better terms.
- Your cash flow is under pressure: One monthly repayment should be easier to manage than several unpredictable ones, giving you more breathing room.
However, a consolidation loan might not be the right option if it significantly increases your total repayment period, if your business is struggling to meet existing repayments, or if you don’t meet a lender’s eligibility criteria.
In these cases, it’s worth exploring alternative finance options or seeking expert advice before proceeding.
See how we helped an insurance brokerage secure £250,000 to consolidate existing debt in our case study.
Business debt consolidation loans FAQs
Will consolidating debts affect my business credit score?
Applying for a consolidation loan may initially slightly impact your credit score.
However, successfully managing and repaying the loan on time should improve your business’s credit score, demonstrating reliability and financial responsibility.
How long does the application process typically take?
Typically, the application process takes between a few days and a few weeks. The exact duration depends on the lender’s requirements, whether the loan is secured or unsecured, and the complexity of your financial situation.
Is debt consolidation suitable if my business has bad credit?
Yes, debt consolidation can still be suitable for businesses with bad credit. While it may limit loan options or lead to higher interest rates, consolidating your debts can help you gradually rebuild your credit score and improve your overall financial situation.
