Managing multiple high-interest loans can be challenging for small business owners. Balancing several payments requires some strategic thinking, particularly when high-interest payments are sucking cash flow. Debt consolidation may help simplify and reduce the monthly payments, give your business room to grow, and lighten the debt load.
For many small businesses, debt consolidation may be a game-changer. Whether through an SBA 7(a) loan, a bank term loan, or a dedicated debt consolidation loan, understanding your options and the right strategies may get you on a path to sustainability. In this guide, we’ll cover eight debt consolidation strategies and give a few examples of how our customers have refinanced their debt.
Understanding debt consolidation for small businesses
Debt consolidation involves taking out a new loan to pay off multiple existing debts. The goal is generally to reduce your interest rates, simplify your repayment process, and, ideally, lower your monthly payments. Here are some options small business owners may consider:
- SBA 7(a) Loans: Backed by the Small Business Administration (SBA), with favorable terms and lower interest rates, the SBA 7(a) loan is generally one of the most popular for small businesses. Business owners may use an SBA 7(a) loan for debt consolidation, but eligibility requirements include a strong credit score and a solid business plan.
- Bank Term Loans: These are typically fixed-rate loans from banks that provide a predictable monthly payment and stable interest rate over time. A bank term loan may be a great option if you want to consolidate high-interest debt into a more manageable, long-term payment.
- Business Debt Consolidation Loans: Some lenders offer specific debt consolidation loans for businesses. These loans combine debts into one payment and are designed to pay off high-interest debts. They often have better rates and terms.
8 debt consolidation strategies for small business owners
For business owners looking to reduce debt and increase cash flow, consider exploring these eight strategies to help build a solid foundation for future growth.
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Choose healthier financing options from the start
Starting with the right financing may reduce the need for costly debt consolidation down the line. Before taking on debt, ask yourself these key questions:
- Understand your expenses: Can I afford to take on new debt? Go through your expenses and see where you’re overspending. That will generally tell you if you have room for more debt without breaking the bank. For instance, if fixed costs are already high, a lower-interest SBA loan may be more manageable than a high-interest option. If debt payments are a significant part of your monthly overhead, consider refinancing to reduce these costs.
- Know where you’re profiting: What parts of my business are driving revenue? Evaluate which areas generate consistent revenue. Directing debt toward profitable activities, like expanding a high-demand product line, may make debt a growth tool instead of a liability. By focusing on revenue-generating areas, you’re more likely to see returns that offset the cost of debt.
- Identify where you need support: Where would additional funding help most? Is the debt for a strategic goal or just to cover shortfalls? If funding is needed for a short-term gap, a line of credit may be more suitable than a long-term loan. On the other hand, if you need cash for a longer strategy, an SBA loan with good terms may give you the flexibility to manage payments without straining finances.
The need for financing that aligns with long-term growth goals became evident to a chemical manufacturing company with decades of experience in the industry. They initially used a high-interest term loan and an expensive line of credit to finance their high growth. These combined to be a monthly payment of almost $30,000. This high-cost debt put too much pressure on their cash flow and prevented them from investing in profitable growth opportunities. SmartBiz® helped them refinance the existing debt into a $400,000 SBA loan and added $100,000 in working capital. This reduced their monthly payment to $6,958 and freed up $23,000 monthly and $276,000 yearly. Now they can invest in growth confidently.
2. Consolidate your existing debt
Consolidating debt involves taking out a new loan and using it to pay off others. In order for this to make sense financially, the new loan should have a lower interest rate than your current loans. Debt consolidation may help lower monthly expenses and enhance cash flow by replacing multiple loans into one with a lower interest rate.
For example, a SmartBiz customer, who is a roofing contractor, managed to consolidate a significant merchant cash advance with a monthly payment of $17,000. Through an SBA loan, they reduced their payments to $5,218—an incredible monthly savings of nearly $12,000. With lower payments, they could redirect funds toward operations, strengthening cash flow and allowing for greater growth potential.
3. Increase revenue to free up cash flow
Typically, one of the simplest ways to create more cash for debt payments is by cutting back on non-essential expenses. Here are some strategies that may help improve cash flow:
- Reevaluate office expenses. Can your team work remotely, or are you paying for unnecessary office space?
- Look at service costs. Can you outsource things at a lower cost?
- Review subscriptions. Are you subscribed to software or memberships you don’t need?
These minor changes may significantly impact cash flow. A quick-service pizzeria found itself juggling three high-interest lines of credit to support recent growth, with combined monthly payments totaling $8,500. By consolidating these debts through SmartBiz and cutting non-essential expenses, they reduced their monthly payment to $4,175, freeing up cash flow and nearly halving their debt costs. This extra cash gave them the flexibility to reinvest in their business and continue expanding, showing the impact of both refinancing and trimming unnecessary expenses.
4. Generate additional cash infusions
When cash is tight, consider other ways to boost revenue fast and improve cash flow. Here are some ideas:
- Sell unused equipment or extra inventory for cash.
- Offer limited time promotions or flash sales to get customers engaged and revenue.
- Use existing skills to host paid classes or workshops.
A quick cash injection may make debt payments more manageable.
5. Prioritize debt payments strategically
When tackling multiple debts, two strategies are generally the most effective:
- Focus on the highest interest rate: This approach may save you the most money in interest over time.
- Pay off the smallest balance first: While this typically won’t minimize total interest as quickly, it provides a quick win, which can be motivating.
Both methods have merit, so consider what fits your financial situation best.
For instance, a chiropractic office with startup costs had $50,000 in credit card debt and two high-interest lines of credit and was paying $3,500 a month. By consolidating those into one SBA loan, they paid off the high-interest debt first, reduced their payments to $2,365 a month, and saved $5,000 a month. This not only saved interest but also freed up cash flow and gave them a fresh start and motivation to move toward their future goals.
6. Renegotiate your debt terms
Creditors may be more willing to negotiate than you think, especially when they see you’re committed to paying what you owe. Here are some options to consider:
- Extend loan terms to reduce monthly payments
- Ask for a lower interest rate or partial debt settlement if possible
- Look into hardship programs offered by some creditors for businesses in financial distress
Negotiating with creditors may help ease cash flow without adding more debt. It may be worth contacting each creditor to see what they are able to do.
7. Embrace strategic debt
As you now know, there’s good debt and bad debt. Good debt can generally offer unique benefits. Good debt may be a tool for growth. For example, let’s say that you took out a loan (after ensuring it was the right fit for your business) and used the money to purchase a piece of equipment that will help you make your products faster. Or, if you qualified for a low-interest SBA loan via SmartBiz, you could generally use that to pay off debt with a higher interest rate. In both scenarios, the strategic debt may ultimately increase your bottom line.
For one SmartBiz customer, refinancing high-interest debt saved them $13,000 monthly. A law office specializing in estate planning and family law carried a $132,000 merchant cash advance with a burdensome $15,556 monthly payment. By securing a low-interest SBA loan through SmartBiz, they were able to lower their monthly payments to $2,435. By strategically refinancing their debt, they shifted high-interest debt into a manageable, lower-cost solution—this created room to reinvest in growth instead of paying off debt.
8. Build and stick to a budget
Having a plan of attack is often integral to the success of your consolidation strategy. A budget may be the key to success. An effective budget should not only track monthly expenses and debt payments, it should also help you prepare for irregular costs like annual licensing fees or holiday inventory spikes.
Additionally, as a savvy small business owner, you likely know to expect the unexpected. Consider setting aside money for an emergency fund that can help handle unexpected expenses. And remember that while debt is often necessary for growth, a balanced budget may help ensure it doesn’t become overwhelming.
Don’t forget to budget for the “nice-to-haves.” Just because you have debt doesn’t mean your small business shouldn’t be allowed any discretionary spending.
Final thoughts: Debt consolidation requires a thoughtful strategy
Debt consolidation is a viable strategy for small business owners looking to reduce monthly payments and streamline debt management. It’s not a one-size-fits-all solution, so carefully considering options, terms, and your business’s unique financial landscape is key to achieving a sustainable outcome.
