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What Is a Business Debt Consolidation Loan?

Business owners face numerous challenges, such as revenue shortfalls that can make it difficult to cover expenses and pay business debts. While some small businesses turn to merchant cash advances, a better option may be a debt consolidation loan. In short, a consolidation loan may help you pay off your small business debt by allowing you to move or “consolidate” your debts under one loan.

What Are the Benefits of a Debt Consolidation Loan?

Potential benefits of consolidating business debts include:

  • A lower interest rate – A debt consolidation loan may have a lower interest rate, provided that you meet the credit criteria. This will lower the total amount paid over time and lead to significant savings. 
  • Streamlined payments – Consolidating business debts into one loan allows you to streamline multiple payments into one monthly payment. This can help your business monitor payments more efficiently and avoid late payments.
  • Improved credit score – Consolidating your business debt and staying current on your payments will help to raise your business credit score. Lowering your debt utilization and improving your payment history are key factors in your credit rating.

There are cons to consolidating your business debt, however, including:

  • Total debt is not reduced – It is important to note that a debt consolidation loan does not eliminate any debt but merely moves it into a new loan; any saving depends on your ability to secure a lower interest rate.
  • Not a long-term solution – A consolidation loan is only a short-term solution. If you fail to address your cash flow problems, you will likely encounter the same debt problems in the future. 
  • Paying more overtime – By consolidating your business debts into one loan, you will start a new loan term, which may be longer than the term of the existing loans. Not only will it take you longer to pay off your debt, but you may also end up paying more in interest over time, even if your interest rate is lower.

Alternatives to Business Debt Consolidation

If a business consolidation loan is not a workable solution to your debt problems, there are other options, including:

  • Refinancing – Refinancing differs from a consolidation loan in that you only refinance a single loan, while consolidation involves combining multiple loans. Refinancing may be a better option if you are only delinquent on one loan or you qualify for a significantly lower interest rate.
  • Debt settlement – Business debt settlement involves renegotiating your debts with creditors to pay less than you owe. However, the portion of the canceled debt is considered taxable income by the IRS. 

The Takeaway

Whether you are struggling to pay your business debts or meet the payment terms of a merchant cash advance, both your business and personal assets may be at risk. By contacting and working with an experienced debt-relief specialist, you can determine whether a business debt consolidation loan is the right option for you.