You can use a debt consolidation loan to pay off multiple debts and consolidate them into one single repayment.
Check for early payout fees or setup charges that could wipe out the savings from switching to a new loan.
If your business or personal credit has improved, you can use that to negotiate better rates or loan terms when consolidating.
If your business has multiple debts or is looking to reduce its debt repayments, a debt consolidation business loan can streamline and lower your interest repayments. This can save your business money and help you get out of debt sooner.
How does debt consolidation work?
Debt consolidation is the process of incorporating multiple debts or loans into one, with the goal of making it easier to manage repayments, reduce the cost of the debt, or refinance your existing loans with more favourable terms. As with personal debt, you can use a business loan to consolidate your business's debt into a single loan.
You will need to apply and be approved for a new loan which can cover your existing debts. You then use the funds from the new loan to pay off the amount(s) owing on your other debts, and then make repayments on the new loan until it has been paid off. If the new loan has a lower interest rate than your existing loans, you may also be able to reduce the size of your repayments and save money.
However, you need to be aware of any additional costs or fees that you will need to pay to ensure that debt consolidation makes financial sense for your business. This may include fees for paying off your existing loans early, as well as any other fees or charges associated with the new loan.
Is debt consolidation right for my business?
There are a number of situations where debt consolidation may be a good idea for your business. These include:
Your business has multiple debts or loans
If you are currently making repayments on multiple loans or finance, debt consolidation can streamline these payments into one. It may better suit your business's cash flow to make one regular larger payment, incorporating all your current debts, than many smaller payments on different schedules.
You have found a better loan product
Many businesses apply for finance with their existing bank and do not compare a range of options. If this is the case, you may have missed a business loan that is better suited to your business. If you believe your interest rate is too high, or your current payment schedule is unmanageable, it is always worth researching alternative loans to see if there are any that can offer more favourable terms.
Your personal credit score or financial situation has improved
Generally, when a lender assesses your business loan application, they take your personal finances and credit history into account. These can influence the loan terms you are offered, including the interest rate and size of the loan amount. If your financial situation or credit history has noticeably improved since you originally applied for your current loans, it may be worth checking to see if you're eligible for a new loan with better terms and rates.
Your business's finance or credit history has improved
As with your personal financial situation, if your business credit situation or finances have improved, you may be able to secure a consolidation loan that offers a lower rate to cover your existing debts.
Your business needs to borrow more
If your business needs access to more working capital but already has a number of debts, lenders may be unlikely to approve you for an additional loan. However, by consolidating your debts into a business loan with more favourable terms, you may reduce the risk you represent to the lender and may be approved for additional funds.
What to consider when looking at business debt consolidation
While using a business loan for debt consolidation can be a useful tool for managing and reducing debt, you should keep the following in mind to make sure you're getting a better deal.
Compare the loan terms, rates and fees. Before applying for a debt consolidation loan, you should check that the interest rate and fee structure are more favourable than your existing loan(s). If you apply for a loan with a higher rate, or additional fees, you may end up paying more than if you were to stick with your existing loans. You should also consider the loan term. While having a longer time in which to pay off the loan may help your business manage repayments, you may end up paying more in interest on a loan with a longer loan term, even if the advertised interest rate is lower than your current rate.
The lender is reputable. You should always do your due diligence when comparing loan products. Try to confirm the lender is trustworthy and licensed before applying for a loan, especially if the loan terms seem too good to be true. You can check whether a lender is licensed to provide finance using the ASIC register.
What are my business debt consolidation options?
Generally, a business loan may be the most suitable option for a business looking to consolidate debt. However, you have a number of finance options to help consolidate business debt. These include:
Business line of credit. Unlike a normal business loan, a business line of credit gives you ongoing access to funds. If your existing debt is relatively small, a line of credit loan may be suitable. However, you will generally have a smaller window in which to repay the debt before you are charged additional fees or interest.
Business credit card. As with a business line of credit, a business credit card may be more appropriate for businesses looking to consolidate a small amount of debt.
Secured business loan. If you have access to an asset, such as a commercial or residential property, you can use it as security against a secured business loan. You will generally receive a lower rate with a secured loan, which may help reduce the size of your repayments if you use it to consolidate your debt. However, if you are unable to pay off the loan, you risk losing the property, so it's important to ensure you can manage the repayments before committing to a secured business loan.
What alternative options do I have to debt consolidation?
If you are struggling to pay your current business debts, there are several other avenues that you can take. These include:
Balance transfer business credit card
Instead of taking out a new loan to reduce the cost of your repayments, you could see if there are any business credit cards that have a balance transfer offer. Sometimes, a business credit card may offer a 0%, or low 2-3% introductory rate on balance transfers. This is a limited time promotional interest rate that allows you to move debt from your existing accounts onto the new card, thus reducing your interest repayments.
Be aware that a 0% or low interest period is limited (depending on the provider, but usually up to 3 years), after which you will likely be charged a much higher rate.
National debt helpline
If you want to speak to a professional on the phone about your business's money problems, you can call the National Debt Helpline for free financial counselling on 1800 007 007.
Create a budget
There are numerous free budgeting tools, templates and apps that could help you to create a strict budget for your business. Creating a budget and sticking to it may give you back some control and help you to meet your current debt obligations, without having to apply for a new loan.
Business liquidation
Business liquidation is usually what happens when your company becomes insolvent and is unable to pay its debts. While insolvency and liquidation may seem like the worst thing that could happen to your business, there may be some instances where liquidating is a beneficial move.
Liquidating your business means that your debts, including those to the ATO, are written off and/or dealt with in the liquidation process. That being said, it's a good idea to contact a professional adviser before making moves like this.
Frequently asked questions
Yes, many specialist lenders in Australia allow you to refinance ATO tax debt into a consolidated business loan. This can help you avoid potential insolvency, provided your business has the cash flow to service the new loan.
It depends. If you are consolidating high-interest credit card debt or short-term caveat loans into a longer-term secured loan, you will likely reduce your interest rate. However, if you extend the term significantly, you might pay more interest in total over the life of the loan.
Secured loans (backed by property) offer the best chance of successful consolidation because they carry lower risk for the lender. Unsecured consolidation is possible but harder to obtain if your business is already struggling with multiple debts.
The application itself leaves a footprint on your credit file. However, if consolidation helps you avoid defaults or court judgments by making repayments more manageable, it will protect your credit score in the long run.
Tom Stelzer is a journalist with 6 years of experience covering personal finance, specialising in investment and cryptocurrency. With a Master of Media Arts and Production and a Bachelor of Communications in Journalism from the University of Technology Sydney, Tom provides expert analysis on digital assets and market trends, helping readers navigate the fast-evolving world of finance.
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Bria Horne was a writer for Finder, with a specialist knowledge of personal loans, car loans and business loans. Originally from the UK, Bria has been a professional personal finance writer in Australia for over 2 years. She has an M.A and B.A in Philosophy and Literature from the University of Sussex, and previously worked on the UK’s leading hospitality publication.
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