Disclaimer: Information in the unsecured business loans articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the unsecured business loans articles often covers financial products that Biz2Credit does not currently offer.

Business owners consolidate business debt for several reasons, not simply for financial relief. Some businesses use debt consolidation as a catalyst for growth. Small businesses minimize their expenses, find cost savings, extend their term length, or get a new loan with more favorable terms.

Consolidating business debt can free up resources and facilitate an increase in business growth through better financing terms. Here are some defining strategies for managing debt consolidation that can create better business processes.

What is Debt Consolidation?

Debt consolidation means taking out a new loan to pay off a number of liabilities and consumer debts. Multiple debts are combined into a single, larger loan, usually with more favorable payoff terms, including a lower interest rate, lower monthly payment, or both. Creating single payment systems makes it easier to keep up with multiple different debt payments. With multiple short-term loans, consolidating to a longer-term loan buys you more time to pay off your loans.

Secured Loan vs. Unsecured Debt Consolidation Loan

Secured debt consolidation loans are typically what you’ll find at banks and credit unions. Financial institutions use collateral, such as business assets like equipment or property, and typically have better interest rates than unsecured loans. Collateral is pledged as security for the repayment of the loan. In the event of a default, the collateral offered up in the loan will be seized by the financial institution to cover the remaining balance.

Unsecured loans don’t require any collateral and are usually easier to get. Unsecured debt consolidation loans online make getting a loan convenient, but interest rates will be higher than secured loans because the lender doesn’t have the same guarantee that the loan will be paid back.

Personal Loan vs. Business Loan

Aside from secured vs. unsecured loans, when you consolidate business debt, you can choose to do so through a personal loan or through another business loan. With a personal loan, you’ll be using your own credit, not the business’s. This can be helpful if you have a stronger credit history than your business, but it also makes you liable financially for payments and for any collateral requirements in the case of a default.

With a secured personal loan, your own personal assets will also be on the line. Whether or not you choose a personal loan or a business loan depends on the financial health of the company and your willingness to take on personal risk for both an unsecured loan and a secured loan.

How to Consolidate Business Debt

Now that you know what debt consolidation is, how do you go about combining multiple loans into one large debt payment plan? Let’s say you have three different loans: a balance of $3,000 at an interest rate of 20%, $4,000 at an interest rate of 23%, and $6,000 at an interest rate of 25%. One of the ways to consolidate is to take out a new loan for $13,000 and use it to pay off all the outstanding debt. This consolidated loan could have a similar interest rate or a variable rate depending on the terms of the deal with only one loan to monitor and make payments against. If interest payments on the new loan are less than the combined payments you were making on your previous three, or you have a longer period to pay it back

What is Refinancing?

Refinancing occurs when a business or person revises the interest rate, payment schedule, and terms of a previous credit agreement. The goal of refinancing is to optimize an existing debt, rather than consolidating multiple debts, by replacing the terms of an existing debt with a loan that has better terms. A longer term loan would shave down your monthly payment or allow you to keep a monthly payment similar to your current one while taking out a larger principal amount and thereby borrowing more overall. A lower interest rate would save you money by accruing less interest over time.

How to Refinance Debt

To understand how to refinance debt, it helps to consider existing loan debt. Let’s say you have a 10-year business loan at a fixed interest rate of 10%. If the market rates have gone down, you could take out a new loan at 7.5%. If there is a lender who’s willing to work on a deal like this, you can refinance your business loan by applying for a new loan and use it to pay off the old one.

When considering debts, you have to take a look at your business and how it has performed since you took out the last loan. If your credit or revenue hasn’t improved since then, it’s unlikely that you and your business will be able to find a better financing option now, especially since you have more debt than you did last time you were looking.

Here are two key areas to consider for debt consolidation:

APR vs. Interest

Look at your new financing options and look at the APR of the various loans. APR will include all the additional fees you will have to pay each year and will give you a complete picture of the total cost of the loan each year. Just because the interest rate is lower on a refinancing or consolidation loan doesn’t mean that the overall cost of the loan will be lower as well. Term lengths also substantially impact the expensiveness of the repayment schedule.

Prepayment Penalties

Prepayment penalties are another example of a situation where rates may not be accurate. Prepayment penalties are fees your original lender has set up in your original loan contract in the case that you close the loan before your full-term length is up. Even though a new loan may have a lower interest rate, you might not save money by paying it off early and refinancing.

In fact, you may lose money from paying it off early. Lenders often add these in as a protection for the money they loan out. A beneficial new loan will allow you to still save money in spite of the prepayment penalties on your current loan. If the penalties outweigh the cost savings you will get from the consolidation or refinancing of your debt, consider holding off.

Business Debt Consolidation vs. Refinancing

The outcomes of business debt consolidation and debt refinancing are often very similar. In some instances, businesses may refinance and consolidate debt at the same time.

If your business has multiple loans and lots of different payment dates each month, business debt consolidation can minimize administrative costs, simplify your finances, and possibly save money. If you’ve identified that you’ve got just one loan that has an unfavorable APR based on the current interest rates, refinancing may be a better option.

Whether you decide to consolidate, refinance, or both, be sure to talk to a funding expert you can trust for what works best for your business. The last thing you want to do is to maneuver your business’s debt into a situation that is less favorable than the current situation. However, business debt consolidation could be a catalyst for growth for your small business.

FAQs About Business Debt Consolidation

Is debt consolidation a good idea for a business?

Business debt consolidation can be a good idea for. With the right debt consolidation, you can simplify payments, reduce costs, and potentially free up cash flow for your small business.

Can I get a business loan to consolidate debt?

Yes, if you have multiple business loans, you can consolidate them into one new business loan.

How can small businesses get out of debt?

Small businesses can get out of debt by consolidating debts, restructuring debt payments, finding the best refinancing solutions, and renegotiating the terms of any existing loans. Learn how to manage debts and focus on strategies for improving existing debt payments.

What is a small business debt consolidation loan?

A small business debt consolidation loan is a new loan that rolls your existing loans into it. Benefits to acquiring a business debt consolidation loan may include a lower monthly rate, a single payment plan, or an extended time for repayment.

What are the best unsecured loans for small businesses?

The best unsecured loans for small businesses don’t require collateral, provide financing quickly, offer financing options to individuals with poor credit, and keep rates relatively low. Unsecured loans are often a good choice for those businesses that are looking for fast financing or don’t have the credit for a secured loan. However, each applicant should research thoroughly to find the best solution for them and their business.

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