Business debt consolidation: when combining borrowing helps

Business debt consolidation is taking out one new facility and using it to pay off several existing business debts, so that you owe one lender and make one repayment instead of several. It is a way of restructuring borrowing, not of removing it.

The new facility might be a term loan, a secured loan or an asset-backed facility, depending on what the business owns and what the lender will accept. The old debts are cleared and the new one takes their place.

People often say “consolidation” and “refinancing” interchangeably. Refinancing usually means replacing one debt with another on different terms. Consolidation is the version where several debts become one. Either way, you still owe the money.

In practice you list what you owe, ask for a new facility large enough to settle it, and use the money to close the old debts. The steps run in this order:

1. List every debt: lender, balance outstanding, monthly payment, how long is left and any fee for settling early.
2. Work out the total you would repay if you changed nothing, including interest and fees still to come.
3. Ask lenders what they could offer, and compare the new total repayable against the old one, not only the monthly payment.
4. If you accept an offer, make sure the old debts are actually settled, in writing, and that no payment is missed while that happens.
5. Keep the new repayment in your cash-flow forecast from the first month.

A broker can compare facilities for you, but the sum is yours to check. The lender that makes the new facility decides whether to offer it and on what terms, and an offer is always subject to status and lender criteria.

Consolidation tends to help when the business is sound but its borrowing has become awkward to manage: several repayments on different dates, with terms that no longer suit how the business earns.

The test is whether the new arrangement fits the business better over its whole life, not whether the first month feels easier.

Most borrowing with a clear balance can be settled from a new facility, but each debt has its own terms, so what is practical depends on the agreement and the lender providing the new money.

On tax debts, borrowing to pay HMRC costs interest and fees, and a payment plan with HMRC may cost less. Our guide to HMRC Time to Pay explains the option, and an accountant can tell you which is cheaper for your position.

You tell by comparing the total you will repay under each route, since a lower monthly payment does not mean a lower cost. The arithmetic below uses round, made-up numbers to show the effect of a longer term.

Here the monthly relief is real, and so is the extra £6,000. That can be a fair price for breathing space, but only if you have chosen it knowingly. Add any arrangement fee, early-settlement charges on the old debts and whether the new facility is secured, then compare using the method in our guide to comparing business lenders.

Consolidation usually uses a term loan, either unsecured or secured on an asset, because it gives one balance and a fixed repayment schedule. The right type depends on what the business owns and how long it needs.

• Unsecured business loans do not need an asset as collateral, but lenders often ask directors for a personal guarantee.
• Secured loans are backed by property or other assets you own, which can widen what a lender will consider and puts that asset at risk if you cannot repay.
• Asset finance can release value tied up in equipment or vehicles you already own.

You can see which lenders work in each area in our directory of business lenders. Read about the personal exposure first in our guide to personal guarantees for business loans.

A lender will look at how the business trades, what it already owes, whether it can afford the new repayment and the credit history of the business and, often, of its owners. Each lender sets its own criteria.

Credit reference agencies give lenders information to help them decide whether to offer credit, according to the Information Commissioner’s Office. A personal credit file holds details such as how you have run your credit accounts, county court judgments and insolvency data. A history of missed payments across the debts you want to consolidate can make a new facility harder to arrange or more expensive.

If a judgment is on the record, our guide to what a CCJ is explains how long it stays and how to have it marked as satisfied.

If the business cannot pay its debts as they fall due, take advice before borrowing more, because consolidation is not an insolvency procedure and a new loan on top of unpaid debt can make things worse.

The Insolvency Service says a company is insolvent when it cannot pay its debts, either because it cannot pay bills as they fall due or because its debts are larger than the value of its assets. At that point a director’s priorities shift from shareholders to creditors, and directors must treat all creditors the same, avoid making creditors’ position worse and consider appointing an insolvency practitioner.

For a sole trader the stakes are personal. GOV.UK says sole trader businesses have unlimited liability, so the owner is personally responsible for all of the business’s debts, and only individuals can become bankrupt. Directors of a limited company are not normally personally responsible for company debts, but a personal guarantee, or mismanagement, can change that. Our guide to company insolvency covers the process.

Capzy is a credit broker, not a lender, and is paid by the lender. We introduce businesses to lenders offering term and secured finance and set out what comes back so you can compare total repayable, not just the monthly figure.

You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria. We do not give tax, legal or accounting advice, and we cannot arrange debt relief: if the business cannot pay its debts, speak to an accountant and a licensed insolvency practitioner.