How to consolidate business debt

Understanding business debt consolidation

It’s not unusual for businesses to take out several forms of borrowing during their lifetime as funding is often needed for different reasons. If you have loans and credit card or overdraft debts, though, consolidating them into one loan may be beneficial.

As you’re likely to be paying different interest rates and fees for your products, consolidation can help you regain control over your business outgoings and make them easier to manage.

What is debt consolidation?

Debt consolidation typically means that you amalgamate your outstanding balances into a single loan. Making one loan repayment each month instead of having to keep track of multiple repayments and creditor terms can help to stabilise cash flow and ease budgeting.

You can also consolidate debts individually by refinancing, and in this instance, you negotiate better terms with your lender. Additionally, business debts can be consolidated within a formal agreement called a Company Voluntary Arrangement, or CVA.

How do you consolidate your business debts?

Debt consolidation loan

With a debt consolidation loan, you can incorporate your existing business loans and borrowing into one new loan and repay a single lender each month. The interest rates and terms offered on a consolidation loan will depend on various factors including your business’s credit rating, the amount you’d like to borrow, and over how long.

Before applying for a loan you should make sure that any early repayment fees or other charges don’t negate the financial benefits of debt consolidation, and it’s advisable to seek professional guidance on this.

Debt refinancing

Debt refinancing differs slightly from debt consolidation in that only one loan is involved. You refinance this loan with another form of borrowing with the aim of accessing a lower interest rate or longer term that reduces the monthly repayment.

You can refinance via another business loan, for example, or by using a new revolving credit facility or other product that repays the original lending. It’s also possible to refinance hard assets, such as equipment and machinery. In this way, you unlock their value and boost cash flow.

Company Voluntary Arrangement (CVA)

If your business is in financial distress and has entered insolvency, it may be worthwhile formally restructuring your debts via a Company Voluntary Arrangement. A CVA is legally binding on all parties and relieves the relentless creditor pressure that can build up over time. A Company Voluntary Arrangement is an official consolidation solution and so needs to be negotiated and administered by a licensed insolvency practitioner (IP).

What are the benefits of debt consolidation for businesses?

• Reduces the chances of late payments
• Simplifies administration
• A lower interest rate and/or longer loan term lowers monthly outgoings
• Can use the value of an existing asset to boost cash availability
• Formal restructuring can stabilise a business

Our team at UK Business Finance will provide more detailed information on consolidating business debt and advise on the best method for your business. Please get in touch to arrange a free, same-day consultation.