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Business debt consolidation refers to the practice of taking out a new loan to pay off any number of other business debts (generally unsecured debts). Multiple separate debts are combined into one new loan, often with more favorable loan terms and conditions. Such terms and conditions may include a lower interest rate, a longer payback period or balloon payment, and/or a lower monthly payment.
For small and medium sized business owners, it may be particularly easy to find that your business has taken on more loans than you’re comfortable having. Emergencies and unexpected dips in cash flow may leave you in a debt cycle that you would like to escape.
Keeping up with multiple loan payment due dates and amounts can become burdensome, even overwhelming. When that’s the case, debt consolidation can be a useful tool to improve cash flow, reduce the number of payments from many to one, reduce the cost of business capital , and ultimately simplifying the process of managing your business.
Business Debt Consolidation Loan
While using any single form of financing to pay off multiple other debts technically is considered debt consolidation, some financial institutions offer specific debt consolidation loans. These loans are financial instruments designed for borrowers who are looking to reduce several debts into a single loan (or who are looking for the benefits associated with a lower interest rate or lower monthly payments).
There are two types of debt consolidation loans: secured and unsecured. Secured loans are backed by collateral, while unsecured loans are not. As such, unsecured loans are more difficult to obtain, often at offer higher interest rates, and require lower qualifying amounts.
Refinance Business Debt
While business debt consolidation and business debt refinancing can be similar, they have some slight differences. When refinancing a loan, you pay off a single original loan using a new loan with more favorable terms. For many small business owners with numerous high-interest rate small-business loans and cash advances, simply refinancing may not be an option. Instead, these business owners may turn to debt consolidation to secure better interest rates and other more favorable borrowing terms and conditions.