Whether you’ve been in business for a few years or have a decade or more under your belt, you know that cash flow never stays the same. That's what gets some entrepreneurs thinking about consolidating their business debt.

As the pandemic taught all of us, our plans can get derailed quickly. The more we can be prepared for a stretch of low cash flow months, the better off we are.

That’s why you’ll want to deploy a few strategies that give you more working capital every month, and look for ways to increase your buffer zone.

There are a few ways you can do this. You can shop for the best prices on raw materials. You can also hire an accountant to restructure your business for the best tax advantage.

One thing that impacts your monthly cash flow is loan payments on your building, fleet, equipment and line of credit. If you're looking for some business loan debt relief to get some breathing room in your budget, consolidating is one way to do it.

How do you consolidate business loans?

Why consolidate your business loans? To consolidate business debts, you roll two or more existing loans into one larger one. Consolidating loans streamlines your finances because instead of writing two, three or more checks to multiple lenders each month, you’ll write only one.

Even better, you’ll spend less per month on loan payments, which frees up some much-needed cash to help you pursue other business goals. After all, if you don’t have enough cash to invest back into your business, so you can hire more employees, add a new line or reach more people with advertising, it will be difficult to grow and meet the evolving needs of your customers.

Read Small-business resiliency: 3 ways to get financially strong

What to consider before choosing a loan

If consolidating business loans interests you, here are a few things to keep in mind.

  • Ideally, your consolidation comes with a lower interest rate than what you’re paying now. That way, along with the lower monthly payment, you also pay down the principal much more quickly.
  • Know which payment terms make sense for your business. Is it a good idea to consolidate your 20-year debts into a 30-year loan? Or are you better off getting a loan that shortens your terms? That depends on your goals. The longer term extends debt, but it can also give your budget room to build reserves and provide a cushion for slow business months.
  • Consider the value of what you’ve already borrowed against. Buildings and land tend to appreciate. But things like office equipment and fleet lose value. Would you want to still be paying them off after they’re gone?

Should you consolidate your loans?

Before you approach a lender about consolidating your business debt, do a little preliminary work to see whether consolidation would be worth it to you. You’ll want to gather the following information:

  • Lender
  • Interest rate
  • Current balance
  • Monthly payment

Using Minnwest Bank’s handy online calculator, Should I consolidate my loans?, run a few consolidation scenarios of your own. You can add and eliminate loans to each run-through so you can see how consolidating would affect your monthly cash flow.

But you’ll also want to consider how it affects the length of your loan and total costs. Unless the new loan gives you a break on interest, consolidating business debt can end up costing more in the long run.

What you’ll need to restructure business loans

Before you go meet with a lender, do a soft check of your credit score. Most lenders are looking for a credit score of 650 or higher.

Then pull together some information about business and your debt that your lender will want to see. This can include:

  • Tax returns
  • Profit and loss statements
  • Forecasts
  • List of debts
  • List of collateral, including equipment

Consolidation vs refinancing: What's the difference?

While loan consolidation and refinancing are similar, they have a couple of minor differences.

  • Consolidation is a new loan for two or more debts, with the goal of lowering your monthly payment.
  • Refinancing is where you trade in just one loan for a new one. Usually, the goal is to lower your monthly payment and your interest rate.

If you’ve found that consolidation wouldn’t bring the debt relief you're hoping for — because it would extend the life of a smaller, unsecured debt, for example — refinancing could be a better option for you.

Read The Complete Small Business Financing Guide

Expertise you can trust

Ready to talk about consolidating your business loans? Talk to one of our commercial bankers. Not only can they offer financial guidance you can trust, but they're also experts in the local economy. Make an appointment today.

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