Business Debt Consolidation

What is business debt consolidation?

Business debt consolidation is the process of taking out one new finance facility and using it to repay two or more existing business debts. The old facilities are closed and the business is left with a single agreement. The new facility is usually a term loan, although a secured loan, an asset-backed facility or, less commonly, a revolving facility can perform the same role.

The term "commercial debt consolidation" means the same thing. It is sometimes used by providers who work mainly with larger limited companies, but the mechanics are identical: multiple commitments are replaced by one.

Consolidation is distinct from business debt refinancing, which replaces a single existing agreement on new terms, and from business debt restructuring, which changes the terms of existing debts by agreement with creditors rather than replacing them with new borrowing.

How does consolidation work in practice?

1. List what the business owes. For each facility: the lender, the balance, the interest rate or total cost, the remaining term, the monthly payment, whether it is secured and whether a personal guarantee was given.
2. Check settlement figures. Each lender will confirm what it costs to repay the facility early. Some charge early repayment fees or require a notice period.
3. Apply for a new facility. The amount requested covers the settlement figures plus any arrangement fee, so that the old debts can be cleared in full.
4. Repay the old facilities. Once funds arrive, the existing debts are settled, often directly by the new provider. The business should obtain written confirmation that each account is closed.
5. Run the new arrangement. One payment on one date. Cancelling the old direct debits and updating cash-flow forecasts completes the process.

Which business debts may qualify?

Most unsecured business commitments can be consolidated, subject to the new provider's criteria. These commonly include:

• Unsecured term loans, including government-backed loans that have moved into repayment
• Business credit cards and charge cards
• Business overdrafts, including balances that have become long-term borrowing in all but name
• Merchant cash advances and revenue-based finance
• Short-term and revolving credit facilities
• Some trade credit arrears where the supplier agrees to settlement

Secured borrowing such as commercial mortgages, hire purchase and asset finance can sometimes be included, but the asset's security position complicates matters, and it is often cheaper to leave well-priced secured debt where it is. HMRC arrears are a special case covered on our HMRC tax debt page.

Who is eligible?

Every provider sets its own criteria, but most will look for a UK-registered business with a trading history, usually of at least one to two years, that can show through recent accounts and bank statements that the new repayment is affordable. Limited companies, LLPs, partnerships and sole traders can all consolidate business debt, although some providers only lend to incorporated businesses.

Lending to sole traders and small partnerships for amounts up to £25,000 is regulated consumer credit, which means the provider must hold the relevant permission from the Financial Conduct Authority and follow its rules. Limited companies generally fall outside that regime. Our personal guarantees page explains why directors are usually asked to guarantee company borrowing regardless.

What documents are usually needed?

• Three to six months of business bank statements
• The latest filed accounts and, for larger facilities, management accounts
• A schedule of existing borrowing with settlement figures
• Identification and address verification for directors or owners
• Details of any security offered, such as property valuations

Our guide to the documents needed to refinance business debt goes through each item and why it is requested.

What does business debt consolidation cost?

The cost has several parts, and all of them need to be included in a fair comparison:

• Interest on the new facility, quoted as an annual rate or, for some products, a fixed total cost.
• Arrangement or facility fees, typically a percentage of the amount borrowed, sometimes added to the loan.
• Early repayment charges on the facilities being cleared.
• Valuation and legal fees where property or other assets are taken as security.
• Broker or introducer fees, which must be disclosed before you commit.

A consolidation loan at a lower rate than the facilities it replaces is not automatically cheaper overall. If the new term is longer, interest accrues for more months, and the total repaid can be higher even though each monthly payment is lower.

Can consolidation reduce monthly repayments?

Often, yes. The reduction usually comes from one or both of two sources: a lower interest rate than the existing facilities, or a longer repayment term. Replacing a merchant cash advance or an expensive revolving facility with a term loan can lower the cost materially. Spreading the same balance over more months lowers the monthly figure but not the total. A provider should be able to show you both numbers before you decide.

Does it reduce the total cost of borrowing?

Only if the saving in interest and fees outweighs the extra interest from any longer term plus the one-off costs of switching. The debt comparison tool lets you test different rates and terms against your current facilities to see how the total changes. Treat it as an educational estimate, not a quote.

Benefits and drawbacks

Are personal guarantees required?

For limited companies, most unsecured consolidation loans require a personal guarantee from one or more directors. This means that if the company cannot repay, the lender can pursue the guarantor personally. Secured facilities may rely on the asset instead, or ask for both. The guarantee should be read carefully, and independent legal advice is sensible before signing. See business debt and personal guarantees.

Can a business with poor credit consolidate its debts?

Sometimes. Providers vary widely in their appetite, and some specialise in businesses with past credit problems, usually at a higher cost or against security. A business with recent missed payments, County Court judgments or an unpaid HMRC liability will find fewer options and should be cautious about expensive offers that solve a short-term problem by creating a longer one. Our guide Can a business refinance with bad credit? covers this in more detail.

Alternatives to consider

• Refinancing a single expensive loan while leaving well-priced facilities in place.
• Restructuring by negotiating new terms directly with existing lenders.
• Invoice finance or cash flow finance where the problem is timing rather than the size of the debt.
• A Time to Pay arrangement with HMRC for tax arrears, covered on our HMRC page.
• Free, impartial advice from Business Debtline where the business cannot meet its commitments.

Frequently asked questions