How do business debt consolidation loans work?
A business debt consolidation loan allows you to pay out some or all of your existing business debts and refinance them into a new single loan with better terms, a higher loan amount or a more suitable structure.
The aim is to save your business money and/or improve cashflow by moving your existing loans to a better interest rate, or by restructuring your debt to reduce your regular repayments. It can also be a way to borrow more or change how your existing loans are secured.
The loans themselves work like a standard business loan, except that instead of using the funds for a new business asset or to provide cashflow, they are used to pay off existing debts the business has.
Here’s what to expect with a debt consolidation business loan:
- Loan amounts starting from $10,000 up to $10 million
- Loan terms from 1 - 7 years
- The finance can be secured or unsecured
What kind of business debt can I consolidate?
ATO tax debt
This is by far the most common type of debt businesses come to us to consolidate. Recent ATO policy changes make it much more expensive and less flexible for businesses to have a large debt with the ATO. Depending on the business, using a business loan to clear tax debt can be much more cost-effective.
Unsecured business loans
Unsecured business loan rates tend to be particularly high for businesses with a short trading history. If you have an extra year of profitable trading under your belt, it’s worth seeing if you can renegotiate your rate and if that’s not possible, refinance with a different lender.
Secured business loans:
It’s less common to refinance a secured business debt but it’s possible. For example, if you plan to sell the asset that the loan is secured by, you may need to restructure the debt if the sale value of the asset is not sufficient to pay out the loan. Or you might simply want a more competitive rate.
Revolving lines of credit
If you don’t have the funds on hand to clear a line of credit, it’s worth considering using a short-term loan to clear the balance. Interest rates on a line of credit or business overdraft can be high and they get expensive if you can’t clear the balance relatively quickly.
Business credit cards
Likewise if you are carrying a large balance on your business credit card, unless you have capacity to clear it in the short term, consolidating it into a fixed term loan could be a big money saver. You can always keep the credit card if it serves a function for your business and simply use the debit consolidation loan to clear the current balance.
Trade and supplier debt
A business loan refinance can also be a good way to tidy up any outstanding trade accounts or supplier debts. This can save you money if you’re being charged interest and fees, while freeing up your account limit to purchase new stock or materials as needed.
According to RBA data, interest rates on new business loans are consistently lower than those on existing finance, with small businesses facing the largest gap between rates for new and existing customers.
On the average small business loan of $218,000 (according to thousands of loans requests from Money.com.au customers), a 1% interest rate saving over a five-year remaining loan term would deliver a total interest savings of $6,127 for a business.
Reasons to refinance your business debt
Get a lower interest rate
Probably the most common reason to refinance business debt is to secure a better interest rate on existing debt. For example, a business that took out a loan when it had limited trading history may be able to refinance the debt a year later on better terms once it has established a solid track record of trading profitably.
Lock in a longer loan term
A business looking to free up cash flow could restructure its debt over a longer loan term with lower regular repayments. The downside of this is higher interest costs over the life of the loan, but for many businesses, the need for cashflow takes precedence.
Borrow more funds
The purpose of the refinance could simply be to access more funds. For example, if you borrowed funds to purchase stock, you may be able to extend the credit facility to enable you to make a repeat purchase or hire a new team member to help process orders.
Change your loan structure
It’s common for business owners to need to use their residential property to secure a business loan if the business is in its early stages. If that’s the case and your business has since built a stronger track record of profitable trading, it’s worth considering a loan restructure to remove any caveat over your home.
Switch to a better lender
If your current lender isn’t offering you the customer service and flexibility your business needs and you still have a good chunk of time remaining on the loan term, you could consider refinancing to a different lender that’s a better fit, assuming you’re not going to pay a fortune in exit fees for the privilege.
Simplify business operations
Particularly for small businesses, managing multiple credit facilities can be a significant administrative burden. Consolidating your business debts into a single loan can help make things easier to manage and less likely you’ll miss important repayment dates, which may incur fees. If you use a business loan broker, the process of consolidating multiple loans is very straightforward.
Phil Collard, Money.com.au Business Finance Expert
"It’s common for a business owner to come to us seeking finance for one purpose – say $30,000 for stock – but they've also got a $20,000 tax debt. That business is often best served by consolidating that debt into a single loan for $50,000. As part of the process, the business can usually secure more favourable terms around payments to help with cash flow as well."
Phil Collard, Money.com.au Business Finance Expert
Reasons not to refinance your business debt
High exit fees
Check your credit agreement(s) to see what fees will apply if you exit early by consolidating to a different loan. If you’ll need to pay a very high fee to cancel the contract early, it may not ultimately be worth it financially to refinance.
Your current loan terms are good
You may want to consolidate for a different reason (e.g. to reduce the number of separate credit facilities you have), but if a particular loan or credit line has a very competitive rate, consolidating it to a new loan may mean you’re actually paying more in repayments. In this case you could even explore the possibility of consolidating other debts into the existing loan with the best terms.
Your business is experiencing serious financial difficulty
If your business is genuinely struggling to meet its commitments, switching lenders is unlikely to help and may not even be possible. The new lender will want to understand your financial position and see that your business can afford to repay the loan. Talking to your existing lender about a repayment plan may be a better option.
What loan options are there for consolidating business debt?
When you’re refinancing your business debt, your new loan arrangement can either be secured or unsecured:
Secured debt consolidation loans
You may be able to refinance your business debt to a secured loan. The most common example of this would be to refinance a business vehicle loan that’s secured by the vehicle to a new secured loan (chattel mortgage). That way the security, as well as the debt, is transferred to the new lender. There are typically fees involved when switching the security from one lender to another.
Unsecured debt consolidation loans
If you have unsecured business debt (e.g. an ATO tax debt), you may have the option of refinancing it with an unsecured business loan. The new loan won’t require any security, but directors of the business are typically required to provide a personal guarantee making them liable for the debt if the business defaults.
Switching from secured to unsecured (or vice versa)
There’s also the option to change the security arrangement when you refinance. For example, if you have a secured loan, you might want to free up the asset being used as security (e.g. to sell it) and therefore convert your secured loan into an unsecured one.
Alternatively, if your business has unsecured debts (e.g. business credit card debt), you could potentially save money by refinancing them onto a secured loan with a lower interest rate where an existing asset the business owns (e.g. property or a vehicle) is used as security.
How to refinance your business debt (step-by-step)
- Make a list of the existing debts you want to consolidate and work out the combined balance and the total amount you need to repay per week, fortnight or month.
- Look at alternative loan options based on your required finance amount. Consider interest rates, fees and features that suit your needs (e.g. ability to make extra repayments). A business loan broker will help you compare business loans from multiple lenders at once, with no impact on your credit score.
- Apply for the new loan. To get a business loan refinanced, you may need to provide statements for the existing debt(s) showing the remaining balance. If you’re applying for a higher finance amount you may need to provide documentation to demonstrate your ability to service the higher repayments, or with a low doc business loan, a personal guarantee may be enough for the lender.
- If your new finance is approved, the existing credit accounts will be paid out and you’ll start making repayments on the new loan.
Business loan refinance example
Let’s use the example of a plumbing business that has an outstanding unsecured business loan of $120,000, a credit card balance of $20,000 and $60,000 in ATO debt. The business owner decides to simplify the debt by combining them into a single $200,000 loan.
To free up some cashflow, the owner also decides to extend the finance term from two to three years.
Under the restructured debt arrangement, the business pays around $8,100 more overall due to the extended loan term, but crucially frees up an extra $3,070 per month in cashflow due to the lower repayments.
Alternatively, the business could maintain the existing repayment timeframe, meaning slightly lower monthly repayments and a total interest saving of around $6,300.
| Current debt | Refinanced debt (same term) | Refinanced debt (extended term) | |
|---|---|---|---|
Unsecured loan | $120,000 @16.99% p.a. with 24 months remaining and $50 monthly fee | n/a | n/a |
ATO tax debt | $60,000 @ 10.65% p.a. with 24 months remaining | n/a | n/a |
Credit card debt | $20,000 @ 20.99% p.a. to be repaid over 24 months with $150 annual card fee | n/a | n/a |
Debt consolidation business loan | n/a | $201,000 @ 12.99% p.a. repaid over 324 months | $201,000 @ 12.99% p.a. repaid over 36 months |
Total monthly repayment | $9,809 | $9,505 | $6,738 |
Total amount to be repaid | $235,425 | $229,126 (includes $1,000 switching fee) | $243,568 (includes $1,000 switching fee) |
Internal vs external business loan refinancing
It’s possible to refinance your business loan with your current lender (i.e. simply to borrow additional funds or change the loan term) or switch to a new lender. There are pros and cons of each:
Pros of refinancing with the same lender
- Likely to be a simpler process as the lender won’t need all of your information from scratch
- Less admin for your business to complete the switch
Cons of refinancing with the same lender
- You may miss out on better finance deals available elsewhere
Pros of refinancing to a new lender
- You’re more likely to get better loan terms as lenders tend to offer more attractive rates to new customers
- An opportunity to find a lender offering better features and/or customer service
Cons of refinancing externally
- Unless you have a good business loan broker working on your behalf, there will be a bit more work involved.
Asset finance
Revolving credit
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