Debt Consolidation for Small Businesses – Is It A Good Idea or Not


Typically, small business owners have very limited resources and thus they turn to every possible lender to help them for taking the business to the next level. However, before they realize it, they are neck deep in debt and scrabbling around to pay the monthly dues. If you are among the many small business owners that are finding it difficult to keep track of multiple debts, and making payments on time, you should take a look at business debt consolidation.

What Is Debt Consolidation

Debt consolidation is a process by which, multiple debt accounts are merged to create a single debt of the same value. Debt consolidation results in a single loan that has to be kept track of with a single monthly payment to be made instead of multiple debts with different interest rates and due dates. Debt consolidation also allows small business owners to restructure their debt by extending the repayment period and negotiating the interest rate to make the repayment more affordable.

Is Debt Consolidation Different from Debt Refinancing

Even though there is a tendency by many people to use the terms debt consolidation and debt refinancing interchangeably, the two actually are quite different concepts. In debt refinancing, you take on a new debt on completely new terms to pay off the existing debt while in debt consolidation, a new loan is taken to replace many smaller debts. While debt consolidation is definitely a form of debt refinancing, all debt refinance may not involve debt consolidation. The principal aim of debt refinancing is the restructuring of the loan with lower interest and longer repayment; typically, a debt consolidation exercise is done to amalgamate multiple smaller loans that the person or business finds difficult to manage. However, debt consolidation when done smartly can not only amalgamate all the existing loans into one loan for easier management but also result in more affordable repayments due to the lowering of the interest rate and extension of the debt repayment term.

Top Reason Why Debt Consolidation Is Beneficial

The principal advantage of debt consolidation is that multiple loans are consolidated into one single loan, which makes it easier for the business owner to keep track of the repayment that is now reduced to just one from the earlier situation where multiple loans with different due dates had to be tracked and the payments made on different dates to avoid the late payment fees.

The other important fallout of consolidation of debt with a reputed lender like is that you get a chance to negotiate an interest rate that is substantially lower than that charged by the credit card companies. This means you can end up saving considerably in terms of interest. Also, you can ensure that the monthly loan repayment amount is more in tune with the business cash flow so that you are not continually overextended and are in a position to run your business properly. The lowering of the monthly amount is achieved by the simple expedient of extending the loan tenor; however, you need to keep in mind that when you repay a loan over a longer period of time, you end up paying more interest.

Why Debt Consolidation May Not Be a Good Idea

When you consolidate debt, you have to remember that it is not only the principal amounts that are carried forward but also the accumulated interest. This means that you end up paying interest on the interest that was due, which is really expensive. Debt consolidation works best when you are able to negotiate with your creditors to waive off the interest completely or at least substantially by promising an immediate settlement. Also, if the business owners ask for a longer tenor when consolidating their debt, they end up paying more interest even if the rate of interest is lower.

Debt consolidation can get you out from a debt trap but it is not a technique that will solve the problem that got you in into debt in the first place. You will have to examine your business operation and finances thoroughly to find ways of managing your working capital requirements so that you don’t have to depend on expensive and multiple debts that are beyond your capacity to repay. Unless this is done and worked out properly, you will land up in the same debt trap sooner or later once again.

Signals That Indicate Business Debt Consolidation May Be Beneficial

Debt consolidation may be worth examining if you have multiple loans carrying high rates of interest because you can qualify for a far lower rate of interest if your credit score is decent; your business is well-established and has been making consistent profits. Debt consolidation is also practical for extending the term of a loan that is ending soon but you need the money to be available with you for longer for realizing the desired ROI. Business debt consolidation becomes more viable only when you have good personal credit that will let you qualify for the best interest rates and other lender terms. While a 700+ score will normally ensure the best rates, you may not benefit if your score is below 600.

Lenders will also be on the lookout whether your business finances have shown a healthy trend in the last few months and will be more amenable to giving you a consolidation loan if your debt service coverage ratio is at least 1:2. If your business is really small, your personal finances will also come under scrutiny; your chances of good terms increase if you have a high income, low debt exposure, few dependents, and a tight household budget. The age of your business is also pertinent as it reflects how stable your business is.


A debt consolidation loan is a very good strategy for managing multiple debts, lowering your interest outgo, and easing the stress on the cash flow provided you are able to negotiate a deal that is truly beneficial. However, you should not unnecessarily increase the loan tenor and be prepared to work hard to get rid of the debt as fast as possible.