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What are Business Debt Consolidation Loans?

Aparna Iyer
Small business debt consolidation loans can help firms discharge their debt obligations under relatively favorable terms.
Debt consolidation is an option that can be considered by individuals as well as businesses. It is a means of tackling mounting debts by availing a loan that can be used to repay a multitude of loans.
The underlying principle is simple. The new loan which is obtained has lower monthly repayments and a longer repayment period as compared to the already existing debt obligations. Thus, a loan with relatively favorable repayment terms is used to discharge existing debts.

Business Debt Consolidation

Businesses have the option of consolidating business credit card debts and other obligations. A business loan or a line of credit can be accessed in order to manage the cash flow situation, purchase short term assets, or consolidate debts. The loan or the line of credit is generally secured.
Refinancing, which is the process of paying off a secured loan by opting for another loan, usually of the same size using the same property as a collateral, may also be considered as an alternative to consolidation.
If debt consolidation and refinancing do not yield the desired results, the company may be forced to file for Chapter 11 bankruptcy protection. Reorganization may not be a bad option for large companies, but small companies should avoid filing bankruptcy since the chances of recovery are slim.
Typically, small businesses can access Small Business Administration Loans (SBA Loans) and lines of credit that can be used for a variety of purposes, including debt consolidation. The SBA 7(a) Term Loan is appropriate for small businesses interested in consolidating debts.

Small Business Debt Consolidation Loans

SBA offers many versions of the 7(a) loan to serve the various needs of small businesses. Business firms desirous of availing SBA 7(a) Term Loans should meet the size and type criteria, demonstrate the ability to repay the loan, should operate with profit motive, and meet other requirements as specified by the 7(a) loan program.
A SBA 7(a) Term Loan offers added flexibility to small businesses, by the way of longer repayment terms, and reduced down payments as compared to other types of business financing. Hence, it is appropriate for consolidating short term debts.
These 7(a) loans are provided by lenders who choose to participate in the SBA 7(a) loan guarantee program. This program ensures that the loans are guaranteed up to 85% of their value, thus protecting the lender against the risk of default.
Both banks and non-bank lenders can participate in this program. The participating lenders structure the loans as per SBA requirements, so that the latter agrees to guarantee a portion of the loan against default.
Since this loan is backed by a SBA guarantee, businesses can access a large amount of funds for a longer period of time while making less monthly repayments. The interest rates on SBA guaranteed loans are negotiated between the borrower and lender and cannot exceed the pre-determined cap.
Small business debt consolidation loans are provided by participating lenders for a maximum period of 10 years. The amount of loan is usually between $30,000 and $350,000, and the SBA guarantee on the loan cannot exceed $1,500,000. This loan is fully amortizing and may be collateralized with real property, deposit accounts, and other business assets.
The rate of interest on the loan can be fixed or variable. The American Recovery and Reinvestment Act has temporarily eliminated loan fees on SBA guaranteed loans keeping in tune with small business debt relief.
In the current situation, SBA 7(a) Term Loans have become synonymous with small business debt consolidation loans, that can be used to ensure that the business pays off its short term debt obligations.