What Is Business Debt Consolidation and How Does It Work?

Many small business owners decide to take out loans to help grow their business and it can be a wise financial move for them. Sometimes you need extra cash flow to cover temporary cash flow issues, purchase new equipment, hire additional team members, and more. If you have taken out more than one loan for your business, loan consolidation can help make repaying your debt easier and more affordable.

What Is Business Debt Consolidation?

In simple terms, business debt consolidation takes accounts and payments together and bundles them into one loan payment. It involves combining different loans into one new loan with a monthly payment.

This debt carries a lower interest rate and lower monthly payments because it is combined into one, making it the payback process easier for the borrower because there is only payment and one creditor.

Debt Consolidation vs Debt Refinancing

People will use debt consolidation and debt refinancing interchangeably but they are not the same. Refinancing is where you obtain a new loan at a lower interest rate as means of paying off other high interest loans. Consolidation is combining multiple loans into one new loan with one payment. The main goal of debt consolidation is to help make payments more manageable by having one payment instead of multiple.

Pros and Cons of Debt Consolidation


  • Payments are manageable: by consolidating the payments into one, it is going to be a lot easier to manage than having multiple payments. This way it is easier to track what you owe and by when it needs to be paid off.
  • Improved cash flow: you can keep more cash for your business each month if you have a low interest rate.
  • Boost credit score: since you will be making one payment and it is easier to manage, you will have a better payment history which can boost your credit score. In the future when you want to get a loan, you will be more likely to get approved for it because of your credit score.
  • Helps on other loan applications: lenders do not like to see a list of multiple creditors so consolidating your existing loans into one can help you get approved for another new loan.


  • Low interest rate is not guaranteed: you may not get a lower interest rate than what you are currently paying so it may end up costing you more. If this is the case, then debt consolidation is not worth it.
  • Paying more interest: you may spend more time paying off your loan and pay more total interest in the long run.
  • Your cash flow issues may not be resolved: debt consolidation is a short-term fix and it may not fix your financial problems.
  • Overall debt amount – due to fees and costs, your overall business debt amount may increase.

Is Debt Consolidation Right for You?

There are some things to consider determining if debt consolidation is right for you.

You qualify: your personal credit score will impact the rate at which you can get a consolidation loan. A score above 620 is considered good and you will get a lower interest rate.

Interest rates: the new loan should have a lower interest rate otherwise it will not work out in your best interest. Begin by calculating the rate you seek and find the average of the interest rates you have on loans now.

Repayment amounts: the debt consolidation repayment should be less than the total of your current loans.

Improved Business Finances: if you see that your business’s revenue and profit have increased, your chance of qualifying for a low consolidation loan increase.

Your personal finances are in good standing: personal finances matter especially when it comes to debt consolidation. Some of the qualifying improvements in your finances include having increased personal income, increased real estate equity, and reduced personal debt.

How to Consolidate Your Business Debt

There are a few steps you must take to consolidate your business debt.

  1. Understand your current terms of your debt

Take a look at your existing business loans and details including the lender, interest rate, payment schedule, and the maturity date.

  1. Look for prepayment penalties

Prepayment penalties can be expensive so check that your existing loans incur this fee before you pay them off to consolidate business debt.

  1. Determine total business debt

Add up all the debt that will be combined into a single loan.

  1. Calculate the APR

Calculate the APR so you know what kind of interest rate to seek for your debt consolidation loan.

  1. Search for a business debt consolidation loan

Research and find the best lender that will work for your business.

  1. Compare APRs

When doing your research, be sure to shop around for the rates and see if you can get a lower APR with the new loan than what your currently have.

  1. Make a decision

Besides the APR, it is important to consider other factors as well such as the terms and interest rates. Consult with a professional for some advice.

  1. Pay off existing debts

If you want to move forward with a business debt consolidation, be sure to pay off your existing debts.

The Bottom Line

Business debt consolidation is a great way to pay off your business debt but be sure to weigh your pros and cons. Before you start to apply, review all the options and see if business debt consolidation is right for you.