Incurring debt is inevitable when running and growing a small business, whether taking out a loan to cover the costs of new assets, using a credit card for business expenses or securing a mortgage for a commercial property. However, as situations change, cash flow problems can arise, and debt can build. Business debt consolidation is a way to ease the burden and help you get back on track.

In this article, we discuss the reasons for consolidating business debt, the pros and cons to consider and the alternative options available to UK companies, including refinancing, working capital loans and lines of credit.

What is business debt consolidation?

Business debt consolidation is an approach many owners take to simplify debt management, combine money owed into one loan facility for easier management and, where possible, negotiate better terms that make repayments more affordable. 

Companies may turn to debt management experts, the government (if aiming to manage and consolidate outstanding tax debts in a Time to Pay scheme), or banks and finance solution providers to help them prevent debt from spiralling.

Why should a business consolidate its debt?

If your business runs into financial difficulties due to unforeseen events, credit card overspend or urgent upgrades/repairs, it can be difficult to meet liabilities. Mounting debt can lead to fines, penalties or reputational damage, which have various knock-on effects. Consolidating debt stops things from getting out of hand, reduces monthly repayments and frees up cash to invest in growth.

When experiencing cash flow gaps, turning to credit cards, business overdrafts, or various forms of business loans can be a timely lifeline. However, you need to ensure affordability and responsible debt management, or they can be a hindrance rather than a help. If debts spiral, it heightens the risk of defaulting on payments, getting a County Court Judgement (CCJ) or the prospect of insolvency.

What is the difference between business debt consolidation and refinancing?

Debt consolidation is the process of turning several debts and outstanding lines of credit into a single debt for easier repayment. Refinancing is a form of business finance, often used in asset finance, mortgages or long-term loans, that enables companies to renegotiate repayment terms to better align with cash flow.

Unlike debt consolidation, refinancing doesn’t require a business to have multiple outstanding debts. It can be simply used to optimise an existing debt, which can include extending repayment periods, lowering interest rates or adding elements of flexibility to account for industry- or company-specific needs and challenges.

How does business debt consolidation work?

Business debt consolidation typically involves taking out a loan to pay off multiple existing debts. Instead of making several payments to different lenders, you make single monthly payments, usually at a lower interest rate and over a longer period.

This is typically how consolidating your business debts works:

• Depending on the loan provider, they will either pay off the debt to existing lenders directly or transfer you the required funds to cover what’s owed.
• Once these debts are cleared, you’ll be left with just one loan to repay to this new lender, with affordable terms agreed, to simplify debt management and ease pressure, letting you operate more freely with improved cash flow.

How does the process differ from using refinancing?

Refinancing solutions differ from business debt consolidation in that they focus on adjusting the terms of one existing loan or lending facility. The aim is to renegotiate an agreement with a finance lender to get better terms, such as a lower interest rate, longer repayment period and/or larger loan amount.

In some cases, you can release equity from assets or a property to provide available liquidity to pay off other debts or for various operational needs. This form of refinancing unlocks working capital tied up in existing assets, often property or high-value commercial equipment, resulting in new or different loan repayment requirements. 

Typical business debt consolidation loan rates

Business debt consolidation loan rates in the UK vary widely, based on various factors, including the type of lender, creditworthiness, the borrowing amount and repayment period, plus whether the loan is secured or unsecured. Unsecured business loan rates are often higher than secured loans,  typically ranging from 6% to 15%, and sometimes higher, due to the increased lender risk, faster access to funds and flexibility. 

Secured loans tend to have lower interest rates due to the collateral required and more rigid lending terms. Rates for business loans used for debt consolidation are usually on the lower end, as they aim to spread the cost of repaying debts over a longer period than usual unsecured lending. 

Can I use a debt consolidation loan for business if I have bad credit?

Yes, businesses can consolidate debt with bad credit, but options may be more limited, and terms are often less favourable as a result. Alternative finance providers and digital lenders, like iwoca, offer greater access to companies with poorer credit, with easier applications and faster approvals.

At iwoca, we look beyond just credit ratings, focusing more on profitability, cash flow and overall business plans. Also, we don’t require assets as collateral, but you may need to provide a personal guarantee.

Common business debt consolidation use cases

There are various reasons for businesses to consider consolidating their debts, with numerous financial and industry-related factors at play. Here are the most common use cases for business debt consolidation:

• Combining multiple high-cost, short-term lending facilities into a longer-term loan to reduce interest payments.
• Business cash advance debt consolidation – paying off a merchant cash advance (or similar agreements) to replace capital repayments as a percentage of card sales with a predictable monthly repayment structure.
• Business credit card debt consolidation – paying off debt owed on multiple credit cards to clear the balance, reduce escalating interest and spread the cost over instalments in a loan agreement with lower rates.
• Improving business credit by reducing various outstanding balances (which may be beyond the recommended credit usage limits).  
• Using business debt consolidation for cash flow management, aligning the new loan with the company’s cash flow.
• Simplifying accounting and debt management, reducing the number of different monthly outgoings and repayment schedules.
• Stabilising your finances before business expansion plans, internal restructuring or selling the company.

Pros and cons of consolidating business debt

While it’s clear that business debt consolidation helps to reduce financial pressure and offers various other advantages over struggling with existing debts, there are also potential drawbacks to consider.

Here we outline the main pros and cons of consolidating business debts into a single business loan:

Key benefits

• Improved cash flow: Replacing multiple debts with one loan, often with a longer repayment period, reduces monthly outgoings and frees up cash.
• Simplified repayment process: Combining various loans into a single monthly capital repayment makes it easier for your accounting team, and budgeting becomes more predictable.
• Interest savings: Consolidating several high-interest debts into a longer-term loan means your interest rates will be lower.
• More working capital available: Securing lower monthly payments will make more working capital available to use across the business and invest in growth opportunities. 
• Options to borrow more than in existing lending facilities: A debt consolidation loan may also offer capital borrowing beyond what’s required to pay off existing debts, depending on the provider, with manageable repayments over a longer period.

Potential drawbacks

• Higher total cost of borrowing: Even if the consolidated loan has a lower interest rate than some existing debts, extended repayment terms can increase overall borrowing costs.
• Committing to long-term debt management: As debt consolidation loans are typically longer-term agreements, you’re committing to carrying the debt for a greater period, which could present issues if economic conditions or business sales worsen in the future.
• The new lending facility doesn’t necessarily fix underlying issues: While debt consolidation helps you restructure debt, you still need to address the causes of your existing debt concerns, whether it’s overspending, cash flow gaps or operational inefficiencies.

Key steps involved in consolidating business debt

So, you’ve learnt about the fundamentals of consolidating business debt and the pros and cons of the approach. Now, let’s outline the key steps involved in the debt consolidation process:

1. Determine your existing business debt status: Gather details of all outstanding credit balances, debt still owed to different lenders and the interest rates, monthly payments and terms in each facility.
2. Review your company’s financial health: This includes your current business credit score, cash flow and working capital positions, plus debt-to-income or debt-service-coverage ratios.
3. Improve your financial position before applying for a debt consolidation loan: Identify potential issues that may prevent approval for a debt consolidation loan and take actions to improve your credit, such as paying various bills on time, lowering credit use (where possible) and correcting potential errors on your credit report. 
4. Organise your financial records: Look at your profit and loss statements, cash flow statements, balance sheets and forecasting, ensuring records are clear and accurate, while addressing any concerns ahead of applying.
5. Define your needs and goals: Lenders will want to get a clear understanding of your priorities when seeking to pay off existing debts and your preferred repayment period/structure.
6. Compare debt consolidation loan options: Explore loans from banks, alternative finance providers and digital lenders, comparing terms, rates and collateral requirements while calculating the overall borrowing costs.
7. Prepare key information and financials: Gather business details and documents, such as recent bank statements, tax returns, existing debt balances and projections, ahead of submitting loan applications. 
8. Pay off your existing debts: Depending on the loan, the lender may pay all creditors directly, or you may need to use capital borrowed in the new loan to pay off each debt.

How to apply for a debt consolidation loan for business 

You can approach various financial institutions for debt consolidation loans. However, many banks only offer personal debt consolidation. OakNorth and Tide are UK banks that offer business debt consolidation solutions, while private lenders, like Rangewell and Fleximize, also offer specialist options.  

Applying for a loan through a bank is a typically longer process with stricter terms and eligibility criteria, while digital lenders, such as iwoca, enable you to apply fully online in minutes, with minimal information and approvals within 24 hours, rather than several days (or even weeks) with banks.

Many lenders require the following when applying for a debt consolidation loan:

• Proof of business ownership and key legal entity details
• Business and personal credit reports
• Recent bank statement and tax returns
• Other financial statements and reports, highlighting cash flow, turnover and forecasting 
• Details of all existing debts and timelines 

Lenders will assess your financial health, trading history, creditworthiness and risk profile and asset value for collateral (for secured loans). With iwoca, we look beyond just credit ratings, focusing more on your business plans, cash flow and profitability 

What are the risks associated with business debt consolidation?

Business debt consolidation simplifies repayment and improves cash flow, but it can expose you to certain risks. For example, you’ll likely be tied into a longer period of capital borrowing, and you may be required to provide collateral to secure the loan, meaning business assets are at risk. 

Also, it’s important to remember that it doesn't necessarily address the underlying causes of your financial strain. You still need to look at improving internal processes and factors such as:

• Debt management
• Working capital and cash flow management
• Credit control
• Business spending
• Supplier relationships 

Business debt consolidation alternatives to consider

Digital lenders, like iwoca, offer flexible loan solutions which are suitable for paying off multiple debts, offering flexibility to manage/consolidate debts while drawing down funds for other operational needs. 

Here are some alternatives to dedicated business debt consolidation loans:

• Asset refinancing: Many asset finance solutions offer options to release equity from existing assets to ease cash flow pressure, unlock working capital or renegotiate finance terms.
• Remortgaging: Similarly, remortgaging can be a way to access key funds to pay off existing loans and remaining debt, and enable more manageable monthly repayments. 
• Invoice finance: Get advanced payments for upcoming client invoices, which you can use to pay off debts without running into cash flow problems – especially helpful for businesses with lengthy payment schedules. 
• Tax loans: Specialist business loans for paying tax bills, which can give you breathing space and extra cash on hand to reduce debt levels elsewhere.  
• Working capital loans: These range from unsecured loans and lines of credit to merchant cash advances, and are ideal for easing cash flow and managing short-term and ongoing financial obligations. 

Get an affordable and flexible business loan

iwoca’s Flexi-Loans are designed for SMEs in the UK seeking to manage cash flow effectively and reach their growth ambitions. Our fast and flexible business loans enable you to pay off existing debts, fund various operational needs and invest in growth opportunities.  

You can borrow from £1,000 to £1 million for a matter of days, weeks or months (up to 60 months) with manageable repayment terms, tailored to your needs and cash flow. Get an approval decision within 24 hours and only pay interest on funds you use. 

Find out how to apply for a Flexi-Loan and use our handy business loan calculator to see what repayments you can expect with iwoca.