Debt consolidation for businesses: how it works

If your business is carrying an overdraft, an equipment loan, a couple of business credit cards and a short-term cash flow facility, the problem is rarely any single one of them. It is the shape of the whole pile: four repayment dates, four sets of terms, and no clear view of what the debt is costing you in total. Debt consolidation is the process of replacing several of those facilities with one.

What does debt consolidation for a business mean?

Business debt consolidation means taking out one new facility and using it to pay out several existing business debts, so you are left with a single balance, a single repayment and a single set of terms. The debts do not disappear. They are refinanced into a different structure, usually over a longer term, and often against different security. It is the same mechanism as a personal consolidation loan, applied to commercial borrowing, and it is arranged the same way: a lender assesses the business, agrees to fund a payout figure for each existing debt, and settles them directly. What changes is administration and cash flow. One repayment is easier to forecast than four, and a longer term usually means a smaller repayment each month. Whether it is the right structure depends entirely on what you are consolidating and what it costs to carry the new facility. A business loan broker can model it before you apply.

Which business debts can be consolidated?

Most unsecured and short-term business borrowing can be rolled together, provided a lender is willing to fund the total. In practice the debts that most often go into a consolidation are:

• Business credit cards and charge cards
• Short-term unsecured business or cash flow loans, including daily and weekly repayment facilities
• A drawn business overdraft that never gets back to zero
• Trade and supplier accounts that have fallen behind
• Merchant cash advances and invoice-based facilities
• Residual balances on older equipment or vehicle finance, where the asset is still worth securing against

Tax debt sits in its own category. Some lenders will fund an outstanding Australian Taxation Office balance and some will not, and the tax treatment of interest — both the interest the ATO charges and the interest on money you borrow to pay it — has changed in recent years. Confirm the current position with the ATO or your accountant rather than assuming it carries over from a previous year.

Does consolidating business debt cost less?

Sometimes, and the only way to know is to compare the total cost of carrying the new facility against the total cost of carrying the old ones. Three things move that number. The rate on the new facility, which is usually lower than an unsecured short-term loan and higher than a mortgage. The term, which is usually longer — a longer term cuts the repayment but adds interest over the life of the loan. And the fees: establishment, valuation where security is involved, and any early payout or break costs on the facilities being closed out. A smaller monthly repayment is not the same thing as a cheaper debt, and short-term business lending is often priced as a fixed fee rather than a rate, which makes the two genuinely hard to compare without doing the arithmetic. Our loan comparison calculator will put two structures side by side on total cost rather than repayment.

Consolidation changes the shape of your debt, not the amount of it. The amount only changes if the new facility is cheaper to carry — and that is arithmetic, not a feeling.

Secured or unsecured: what changes?

An unsecured consolidation is faster to arrange and does not put an asset on the line, but it is assessed harder and priced higher, because the lender's only protection is the strength of the business. A secured consolidation — against business equipment, commercial property, or residential property you own — is generally assessed on the security as well as the trading performance, and is usually available over a longer term. The trade-off is real: you are converting debt that could only be chased through the business into debt attached to an asset you may not want to risk. Where residential property is the security, that is a mortgage decision rather than a business one, and the considerations are set out in our post on using your mortgage for debt consolidation. Secured business lenders also register their interest on the Personal Property Securities Register, so an existing registration against your equipment can limit what a new lender is able to take.

What do lenders look at when you apply?

Business consolidation is assessed on whether the business can service the new facility, not on whether the old debts were a struggle. Lenders generally want to see recent bank statements, usually several months of them, to read the day-to-day cash position; business activity statements or financials to confirm turnover; a clear list of the debts being paid out with payout figures; and the directors' credit files, because unsecured business lending is commonly supported by a director's guarantee. They will also look at how the debt arose. A pile of short-term facilities taken one after the other reads differently from a single equipment purchase, and a lender will want to understand which it is. If your financials are not up to date, low doc assessment using bank statements and BAS is sometimes available, usually on tighter terms. Approval depends on the lender's assessment of the business, its trading history and the directors' circumstances.

When is consolidating business debt the wrong move?

Consolidation treats the symptom, so it works best where the cause has already been dealt with. It tends to be worth investigating when the debt came from identifiable one-off events — an equipment purchase, a bad quarter, a customer that did not pay — and the business is now trading profitably. It tends to go badly where the business is losing money every month, because a lower repayment buys time without changing the trajectory, and the facilities that were paid out often fill up again within a year. It is also the wrong move when the figures do not work: if the new facility costs more in total and the only gain is a smaller monthly repayment, you have bought convenience with interest. Where the business is genuinely in financial difficulty rather than simply over-administered, free small business debt counselling and your accountant are the right first calls, not a new loan.

Next step

Before you apply for anything, write down every business debt you hold with its balance, its payout figure, its term and what it actually costs you — fees included. That list is what a lender will ask for, and more often than not it answers the question on its own. If you would like a second set of eyes on it, send us the list on WhatsApp and we will tell you honestly whether a consolidation improves the position or just moves it around, and what the options across our panel look like for a business like yours.

This article is general information only and does not take your business or personal circumstances into account. It is not personal credit advice. All lending is subject to the lender's credit assessment and approval, and tax questions should go to your accountant.

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