Business debt consolidation means taking out one new finance facility and using the money to pay off two or more existing business debts. The old agreements are closed, and the business is left with a single repayment to a single provider on a single date. It does not make the debt disappear. It reorganises it, usually with a different rate, a different term and, often, a different monthly cost.
In this guide
How the money moves
Picture a business with a bank loan, a business credit card and a short-term loan taken out to cover a quiet quarter. Each has its own interest rate, its own payment date and its own end date. Three direct debits leave the account in three different weeks, and the owner has to keep all three in mind when forecasting.
Consolidation replaces that arrangement in four moves. First, the business asks each existing lender for a settlement figure, which is the amount needed to close the account today. Second, it applies to a new provider for a facility large enough to cover all of those figures plus any fees. Third, when the new money arrives, the old accounts are paid off, often directly by the new provider. Fourth, the business starts repaying the new facility on its own terms.
The new facility is usually a term loan, which is a lump sum repaid in fixed instalments over an agreed period. It may be unsecured, relying on the business's trading record and often a personal guarantee from a director, or secured against property or other assets. The business debt consolidation service page describes the full process, eligibility and costs in more detail.
A simple worked illustration
The figures below are illustrative only. They are not a quote, and they are not based on any particular provider's pricing.
Before and after, illustratively
Suppose a business owes £20,000 on a bank loan with 18 months left, £8,000 on a business credit card, and £12,000 on a short-term loan with 10 months left. The combined monthly outgoing is around £2,900, and the credit card and short-term loan are both expensive.
The business consolidates all £40,000 into one loan over 36 months. Depending on the rate offered, the monthly repayment might fall to roughly £1,300. The business now has £1,600 a month more headroom and one payment to manage.
The cost of that headroom is time. The old debts would have been clear within 18 months. The new one runs for 36. Even at a lower rate, interest is charged for twice as long, so the total repaid over the life of the loan can be higher than it would have been. Whether that trade-off makes sense depends on how badly the business needs the monthly relief.
You can test your own figures, including different rates and terms, with the debt comparison tool. It shows both the monthly figure and the total repaid, because looking at only one of them is how people get caught out.
Who uses consolidation
Consolidation tends to appeal to three kinds of business.
- Businesses that have accumulated finance piecemeal. A loan for a van, a card for stock, a short-term facility for a tax bill. Each made sense at the time, but together they are hard to track and expensive to run.
- Businesses whose monthly outgoings have become uncomfortable. Trading is sound, but too much of each month's cash goes out in repayments. Spreading the balance over a longer period eases the pressure, at the cost of a higher total.
- Businesses holding high-cost short-term finance. A merchant cash advance or a revolving facility used as long-term borrowing can cost far more than a term loan. Replacing it with cheaper borrowing can reduce the overall cost, not just the monthly figure.
Limited companies, limited liability partnerships, partnerships and sole traders can all consolidate business debt, though providers' criteria differ. Most will want to see a trading history, recent bank statements and evidence that the new repayment is affordable. Directors of limited companies are usually asked to give a personal guarantee on unsecured borrowing.
What consolidation is not
Three other terms are regularly confused with consolidation, and the differences matter.
It is not refinancing
Refinancing replaces one existing agreement with a new one on different terms. If a business has a single expensive loan and swaps it for a cheaper one, that is refinancing, not consolidation. Consolidation always involves combining several debts into one. The two can overlap, and our guide to consolidation versus refinancing sets out when each applies.
It is not restructuring
Restructuring changes the terms of existing debts by agreement with the lenders you already have, for example a longer term, a payment holiday or a reduced settlement. No new borrowing is taken. It is usually a sign that the business cannot meet its commitments as they stand, and it is covered on our business debt restructuring page.
It is not insolvency
Insolvency procedures such as a company voluntary arrangement, administration or liquidation are formal legal processes run by a licensed insolvency practitioner. They are for businesses that cannot pay their debts as they fall due. Consolidation is a form of new lending, and a provider will expect the business to be able to afford it. A business that is already insolvent should not be looking to borrow more without taking proper advice first.
A new loan does not fix a trading problem
Consolidation reorganises debt. If the business is losing money, borrowing on better terms only delays the point at which the underlying issue has to be faced. If repayments are already being missed, free and impartial help from Business Debtline is a better first call than a new application.
Questions to ask before you apply
- What is the total I will repay over the full term, not just the monthly figure?
- What are the early repayment charges on each debt I am closing?
- What fees does the new facility carry, and are they added to the loan?
- Is security required, and what happens to that asset if I cannot pay?
- Am I being asked for a personal guarantee, and have I understood what it exposes?
- Will I close the old credit lines, or leave them open and risk running them up again?
- Is any debt I am including, such as a scheme loan, already cheaper than the replacement?
If you want a second pair of eyes on those answers, you can make an enquiry. We can explain the options that may be relevant and, if you ask, may be able to introduce you to third-party finance providers. We do not lend ourselves and we do not give advice.
Key takeaways
- Consolidation uses one new facility to pay off several existing business debts, leaving a single repayment.
- A lower monthly figure usually comes from a longer term, which means interest is paid for longer and the total can rise.
- It is a form of new borrowing, so affordability, credit history, security and personal guarantees all come into play.
- It is not the same as refinancing one loan, restructuring with existing lenders, or a formal insolvency process.
- Ask for the total cost, the fees and the exit charges before you commit, and close the old credit lines once they are repaid.
Related guides
- Can you consolidate multiple business loans? Eligibility, limits and how providers view stacked borrowing.
- The risks of consolidating business debt. What can go wrong and how to avoid it.
- How to compare business finance offers. Putting offers on a like-for-like footing.