Business debt consolidation loans and refinancing guide

Running a business often involves having some form of debt. Borrowing is a standard way to raise finance for business growth, so being in debt is not itself a cause for concern. 

However, if debts from many sources build up over time, with high interest rates and payment dates, this can become an expensive burden that’s hard to control. 

What is debt consolidation?

One solution to having lots of different debts is to combine them into one loan with a single monthly repayment. This is called refinancing or debt consolidation. 

Depending on your circumstances, refinancing can offer many benefits.

These include:

• Lower interest rates: A small business debt consolidation loan usually offers a lower annual percentage rate (APR) than short-term financing options.
• Simplicity: Debt consolidation is simpler than managing multiple debts, as you’ll have a single monthly payment and one account to manage.
• You have longer to repay: As these are longer-term loans (up to 10 years), the monthly repayment is lower. This can give your business time and space to develop.
• Simpler cash flow: You don’t have to make many different payments at various times, so it’s easier to manage your cash flow.
• Borrow more: When you qualify for consolidation refinancing, you may be able to borrow additional funding if you need it.
• Avoid insolvency: Debt consolidation can be a good way of avoiding insolvency by giving you more control over your debt.

What’s the difference between debt consolidation and debt refinancing?

Debt consolidation and debt refinancing are similar, although there are a few differences between the two. 

While debt consolidation involves combining your loans into a single loan for one monthly payment, debt refinancing doesn’t work in this way. 

With debt refinancing, you get a new loan to replace an existing one for more favourable interest rates and terms or even to change the loan type. 

How are debt consolidation loan payments calculated?

When you apply for debt consolidation, the lender considers the amount of debt you plan to consolidate, how long you plan to borrow it, and any fees. 

The lender will then determine monthly payments throughout your term by applying an APR on the overall amount.

Should you consolidate your business debt? 

If you have many business loans that are hard to keep track of or for which you sometimes struggle to make repayments, now may be the time to consider refinancing. 

Here are some other reasons why it might benefit you to consolidate your debt. 

Your credit rating has improved 

If your credit score has significantly improved since the last time you borrowed money, it could be worth applying for debt consolidation as you’ll have a better chance of getting lower interest rates and longer repayment terms. 

Your business finances have improved 

The best time to approach a lender for a consolidation loan is when your business finances are positive or improving.

You’ll be a more attractive prospect for lending and more easily qualify for more attractive rates and terms.

Anything that shows growth or recent success, such as the results of a busy season, increased revenue, or lower running costs, can help. 

Your personal finances have improved 

As a small business professional, your personal finances are also important, as you’ll probably be asked to guarantee your loan.

As with business finances, anything that clearly shows you’re in good financial health, have an increasing income or recently reduced your debt will help. 

Your business has been going for a while 

A key factor that makes your business more attractive to lenders is longevity. The longer you’ve been trading successfully, the greater the opportunities for getting a good debt consolidation deal. 

What are the reasons not to refinance?

If none of the above criteria apply, now may not be the right time to consolidate your debts.

In particular, if your financial situation has deteriorated since you took out credit, you may wish to delay applying for refinancing as you might not be offered favourable terms.

So, you should wait until you are a more attractive prospect for a lender.

In the meantime, you could consider paying down your more problematic debts if it’s practical. This may improve your financial situation and creditworthiness, and make it easier to refinance later.

What are your refinancing options? 

There are two main kinds of debt consolidation loans: secured and unsecured. 

Secured loans 

A secured loan is the most common type for which you must offer collateral.

The loan is secured against a property, vehicle or other major asset that belongs to you, so if you are unable to meet the monthly repayments set out in your agreement, the lender can reclaim their debt from the asset instead.

This usually means the asset must be sold to pay off the debt. 

Unsecured loans 

An unsecured loan doesn’t require collateral, so you’re not putting any other assets at risk.

However, this makes them hard to obtain, and you might not get such good repayment terms.

Usually, you will need a very good credit history to be offered an unsecured loan. 

What are the alternatives to business debt consolidation?

Business debt consolidation or refinancing isn’t for everyone, but other options exist. 

We explore the alternatives for relieving your business debt below. 

• Apply for a business grant: If you work in a specific region or industry, you may be eligible for a business grant, which does not need to be paid back.
• Consider equity finance: You may be able to access more money if you sell some of your business ownership to an investor.
• Consider crowdfunding: You ask people to loan or donate money to help your business. If you’re considering crowdfunding, ensure it’s clear what the money is for and whether there will be a reward, if it’s a loan or a donation that doesn’t need to be repaid.
• Restructure your company: This option involves selling business assets, merging with another company or closing down divisions that are underperforming. 

What is a Corporate Voluntary Arrangement?

You could also consider a Corporate Voluntary Arrangement (CVA) to resolve your debt problems and continue trading. 

It allows you to make a new arrangement with your business creditors so you can pay off your debts sustainably and affordably. 

A CVA must be implemented by an insolvency practitioner who drafts a proposal for your creditors. During the period of the CVA you make a single monthly payment to the insolvency practitioner. 

A CVA may deliver the following benefits: 

• Your cash flow improves.
• You can cut costs.
• The board and shareholders usually retain control of the company.
• It costs much less than administration and is not publicly announced.
• Your creditors get to keep you as a customer and have more certainty of being paid the money they are owed. 

Refinancing your business can revitalise it, provide more security, and aid smoother growth.  

Unbiased can quickly match you with a qualified accountant who can look at your circumstances and the best options.