The 3 Benefits of Consolidating Small Business Debt

Posted at 10:33h in Small Business Financing by Kelly Hillock

The three main benefits of consolidating business debt include lowering monthly debt payments, raising a company’s total available credit, and decreasing how much interest they have to pay. This makes sense for companies that need to simplify and reduce costs to prepare for growth or that want to benefit from lower interest rates. However, it’s not a cure-all that can save a business from declining revenue.

Business debt consolidation works by paying off debts from multiple lenders with money borrowed from a new lender, or by combining multiple debts from the same lender into a single new loan. This can be done with almost any type of debt, from traditional small business loans and lines of credit to credit cards and merchant cash advances.

Pro-tip: Consolidating business debt does not increase your business credit score on its own. If one of the factors that lowered your business credit score was missing monthly or annual payments, consolidating into one payment may prevent misses and help increase your business credit score over time.

Below, we’ll dive deeper into the three benefits of business debt consolidation and how they work.

Lower your monthly payments

Increase your borrowing limits

Decrease interest expenses

Lower Monthly Payments

Consolidating business debt lowers monthly payments either by extending the term of your payback period or lowering the total interest rate you’re paying. Here’s how your monthly payment drops when you use a new 5-year loan to pay off 3 existing debts:

	Existing debt	New debt consolidation loan
Term	1, 3, and 4 years remaining	5 years
Amount	$10,000, $25,000, and $50,000, respectively	$85,000
Rate	10% on all three loans	10%
Monthly payment	$879.16, $806.68, and $1,268.13, respectively	$1,806.00

In this situation, you lower your monthly payments from $2,953.97 to $1,806 even if the interest rate remains the same. This is a great option when you need to free up cash flow to hire more employees or fund advertising to grow.

However, you’ll pay more in total interest because of the longer term, so it’s not a good option if you’re trying to cut long-term costs.

The other way to get lower monthly payments is by lowering the average interest rate across your debt. Instead of the 5-year term loan, you get a 3-year loan at 9% that lowers your monthly payment to $2,702.98. This frees up $250 each month and pays off your total debt a year early.

Increase Borrowing Limits

Business debt consolidation increases your borrowing limit when the new loan has cash left over after paying off other debts. This is similar to how cash-out refinancing works on your house.

Using the example above, you could do a 5-year loan at 10% and borrow $100,000. This would give you $15,000 extra after paying off existing debt, and you could use those funds to invest in new equipment or more inventory to boost sales.

Keeping the 10% rate gives you the added benefit of lowering your monthly payments to $2,124.70. However, if you want to be debt-free on the same timeline, a 4-year business debt consolidation is another option, and it would still lower your payments to $2,536.26 each month compared to the original $2,953.97.

Decrease Interest Expenses to Increase Cash Flow

Decreasing your total interest expense is another benefit of business debt consolidation. You can do this by shortening the payback period or lowering the interest rate across all your debts, or both.

Here’s how much you’d save in total interest expense by consolidating existing debt into a new 2-year loan, even if the new loan has a higher interest rate.

	Existing debt	New debt consolidation loan
Term	1, 3, and 4 years remaining	2 years
Amount	$10,000, $25,000, and $50,000, respectively	$85,000
Rate	10% on all three loans	15%
Total interest	$549.91, $4,040.47, and $10,870.20, respectively	$13,912.76

Even with a higher interest rate at 15%, the new consolidation loan with a 2-year payback period still lowers your total interest expense from $15,460.58 to $13,912.76, allowing you to save just over $1,500.

The shorter payback period also means your business credit score goes up faster as the debt will be cleared from the business credit reports more quickly.

Becoming debt-free sooner also makes you more attractive to future equity investors, because they’ll see less risk in your business, and the money you save on interest expenses can be invested into growing your enterprise.

The other way to decrease total interest expense is with a lower interest rate. SBA consolidation loans can be a great option for accomplishing this because the government backing makes them less risky for lenders to offer, so you may get lower rates.

A 4-year SBA 7(a) consolidation loan at 8% will pay off your existing debts and lower your total interest expense to $14,604.72. It also lowers monthly payments to $2,075.10 so that you meet the SBA 10% monthly payment decrease requirement.

Note: SBA loans can be challenging to obtain because they’re highly sought after by business owners across the country. Nevertheless, even if you aren’t approved for an SBA debt consolidation plan, you still have options.

Alternative lenders, like QuickBridge, can help you consolidate your business debt fast and hassle-free with short-term business loans. Whether you’re looking to reduce your payback period, decrease interest expenses, lower your monthly payments, or simplify your debt load with a solution that’s quick and easy to manage, we’ve got you covered.

Just fill out our quick online form to apply today and our dedicated Funding Advisors will guide you through the process and talk you through your financing options.

QuickBridge does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.