Business debt consolidation: when one loan beats three
Business debt consolidation can cut your monthly payment and still raise the total cost. How to list what you owe, compare both numbers and see what a lender checks.
Reading time5 min read
CategoryBusiness guides
Written byThe bizbritain team
Business debt consolidation means replacing several business loans or credit lines with one new loan. It can lower your monthly payment and make cash flow easier to plan. It does not always lower what you pay in total. A longer term, a new fee or a higher rate can make the same debt cost more, so check both numbers first.
Margins are the reason this matters now. According to a Bank of England survey published on 2 October, 70% of firms expect the recent energy shock to lower their profit margins over the next year. Fewer of them expect to raise prices than in April.
When less money is left over each month, three separate repayments start to hurt. One payment looks like the answer. Sometimes it is.
Section 01
How does business debt consolidation work?
A new lender pays off the debts you already have. You then owe one lender, at one rate, with one monthly payment.
According to the British Business Bank, combining debts this way could reduce your monthly repayments. If your credit score has improved since you first borrowed, you might also get a lower interest rate.
It also sets out the risks. Consolidation can involve extra fees. If your credit score is too low, the new rate may be higher than the old ones. And missing a payment on the new loan could badly damage your credit score.
The new loan can be secured or unsecured. Secured borrowing is usually cheaper, but the lender can claim the asset if you fall behind. Our guide to secured and unsecured business loans explains the trade-off.
Section 02
List what you owe before you talk to a lender
You cannot judge a consolidation loan until you know what it replaces. Put every debt on one page.
The balance and the rate
Write down what is left to pay on each debt and the interest rate it charges. Note whether that rate is fixed or variable.
The months left
A loan with six months to run is nearly paid off. Folding it into a five-year loan stretches it out again.
The cost of leaving early
Some loans charge a fee if you repay them early. Ask each lender for a settlement figure, including any charge.
Security and guarantees
Note which debts are secured on an asset and which carry a personal guarantee. A new lender may ask for the same, or more.
How each one is repaid
Some debts take a fixed monthly payment. Others take a share of your card takings, like a merchant cash advance. Our guide to what a merchant cash advance costs shows how to compare that with a loan.
Section 03
Lower monthly payment or lower total cost?
These are two different questions. A consolidation loan can answer yes to the first and no to the second.
Here is an illustration, not a quote. Say you owe £40,000 across three loans. Together they take about £1,726 a month and have about £4,816 of interest left to pay.
A new £40,000 loan at 9% over five years would cost about £830 a month. That frees up nearly £900 a month. But the interest over five years comes to about £9,820, roughly twice what you had left to pay.
The same loan over three years would cost about £1,272 a month and about £5,792 in interest. The payment still falls, and the extra cost is much smaller. That is before any arrangement fee or early repayment charges.
Myth 01
“One loan is always cheaper than three”
Not always. The rate is only part of the cost. The term, the fees and any early repayment charges decide what you pay in the end.
Compare the total you will repay, not just the monthly figure.
Section 04
Can you consolidate business debt? What a lender checks
Yes, if a lender is willing to take on the whole balance. It will look at the business as if you were borrowing fresh.
Expect questions about your trading history, your recent accounts and your bank statements. The lender will want to see that the business can afford the new payment from its profits. It will also check your credit file and any security on offer.
To apply for a Business Growth Loan through bizbritain, you need at least 12 months of trading history. Two years is preferred for unsecured options.
Consolidation tends to make sense when the new rate is no higher, the term is no longer than you need, and the fees are small. It makes less sense when the business is losing money every month. A new loan spreads that loss out. It does not fix it, so look at prices and costs first.
If the numbers work, a broker can look at the deal across a wider range of lenders than one bank will offer. Our page on business growth finance sets out what we can help with and what we will ask you for.
This guide is general information, not financial advice. Applications are subject to status, affordability and lender criteria.
Got a question the guide didn’t answer? Talk to an advisor.
We’ve arranged growth finance for thousands of British businesses. If you’ve read the guide and you want to see what £25k to £10m from 100+ lenders could do for yours, our advisors are on the phone now.