A business should consolidate multiple loans when it’s paying more than it needs to, or when no one has ever added up what the total borrowing costs. For many businesses, where cash is regularly tied up in stock and working capital, juggling multiple loan repayments on top of that is a problem worth solving sooner rather than later.
How businesses end up with multiple loans
Businesses end up with multiple loans by borrowing to solve immediate cash flow problems one at a time, without stepping back to look at what it all adds up to. A shortfall appears, the bank moves too slowly, so the owner finds a faster lender instead. Then another shortfall appears and the same thing happens again.
A few years of these quick fixes and you’ve got a collection of loans at different rates and repayment dates, with no clear picture of the total cost. I’ve seen businesses carrying £400k or more spread across five or six separate loans. It’s messy to manage and far more expensive than it needs to be.
How businesses end up with more debt than they can manage
Businesses end up with more debt than they can manage because each loan is taken out in isolation, without knowing what’s already owed or why the cash ran short in the first place.
The problem starts with how business borrowing works in the UK. There are two main routes and neither is well designed for what businesses need.
1. Borrowing through high street banks
The high street banks are thorough and risk-averse, and capable of taking three months to reach a decision that often turns out to be no. The relationship manager asks for management accounts, cash flow forecasts, and a detailed business plan, and for many businesses, producing all of that on demand while simultaneously trying to run the company is enough to kill the application before it starts.
2. Short-term online lenders
Then there are the short-term online lenders who can approve £50,000 in a few minutes. The rates are high, but the money is available immediately, and when you’re lying awake at 11 o’clock on a Friday night worrying about making payroll or covering a VAT bill, immediate is what matters.
Ecommerce businesses run into this more often than other sectors because cash is regularly tied up in stock and working capital. When the bank says come back in three months, a fast online lender starts to look like the only option.
Some businesses are also still carrying debt from the pandemic, for example, CBILS loans that made sense at the time but have become harder to service as trading conditions have changed. That older debt sitting on the balance sheet, combined with newer borrowing taken out since, is often where the picture gets complicated.
What nobody explains is that the business is about to take on expensive debt to solve a problem it doesn’t yet understand. The underlying cause is still there, and because nothing has changed, the same pressure that created the first loan eventually creates the next one. The result is a balance sheet carrying four, five, or six loans from different lenders, all at varying rates and repayment dates, and a total borrowing cost that nobody has ever properly added up.
Why a profitable business can still have cash flow problems
The most common reason a business shows a healthy profit on paper while the bank balance tells a different story is that loan repayments do not appear in the profit and loss account (P&L) as an operating expense. They come out of cash. So the P&L can look perfectly reasonable while the financial position deteriorates month by month, and the founder has no obvious explanation for why.
This gap between profit and cash is also where poor borrowing decisions tend to originate. A business without a clear cash flow model won’t know exactly how much it needs to borrow to get through a tight period, so the owner takes what’s available rather than what’s required. A founder who needs £25,000 takes £50,000 because that’s what the lender is offering. The extra money sits in the account and gets spent. When the repayments arrive and the shortfall reappears, the position is worse than it was before the loan was taken out.
When should a business consolidate multiple loans?
The right time to consolidate loans is usually earlier than people think. If you can’t tell someone what you’re paying across all your loans without looking it up across several accounts, that’s a signal. If the repayments are eating into the money needed to run the business rather than funding growth, that’s another. If you took out a loan in the last year or so and the business is still under the same cash pressure it was before, the underlying problem hasn’t been solved.
The place to start is getting every loan down in one place. Many owners who do that for the first time find the total is higher than they thought. A business carrying £400,000 of debt across six to eight loans at different rates is almost certainly paying more than it needs to. Pulling that into one loan at a better rate, with one monthly repayment, can free up significant cash.
The longer it’s left, the harder it gets to sort out. Act when you first notice something doesn’t add up, not after it’s been nagging away for a couple of years.
What does a lender want to see before refinancing or consolidating business debt?
A lender wants to know two things: if the business can afford the new loan, and if the problem that caused the borrowing in the first place has been dealt with.
- They’ll want to see recent accounts, bank statements, and some kind of cash flow projection. The clearer the picture the business can put in front of them, the better the application.
- They’ll want to understand why the debt built up. If the underlying cash problem hasn’t been addressed, replacing expensive loans with a cheaper one doesn’t solve anything. That’s also where getting some financial advice before approaching a lender pays off. The preparation work is often what makes the difference between a yes and a no.
How do I know if I can consolidate my business loans?
Consolidating loans is possible for many businesses, but the credit position and trading performance are important. If payments have been missed or the accounts don’t show enough coming in to cover a new repayment, a lender may not say yes straight away. That doesn’t mean it’s not possible, it just means some preparation work is needed first.
A good broker can also help, because not every lender will look at every situation and someone who knows the market can find options that aren’t obvious from the outside.
How does a fractional CFO help with business debt consolidation?
A fractional CFO helps with business debt consolidation by getting a clear picture of what’s owed and working out what caused the problem in the first place.
Businesses that end up with a tangle of loans usually got there because nobody had a clear picture of the finances. They borrowed to fix a problem they hadn’t properly diagnosed, and took on more than they needed because they didn’t know what was required.
Getting out of that situation is one part of the job. The more valuable part is having someone around who asks the obvious questions before the next borrowing decision is made.
When should you ask for help with business debt?
The right time to ask for help is before the repayments start eating into money the business needs to operate, not after.
By the time someone gets in touch, the cash position is usually already worse than the owner realises. Businesses that end up in real difficulty usually saw it coming for a year or more and did nothing about it. The earlier the conversation happens, the more options there are.
FAQs about business debt and loan consolidation
What is business debt consolidation?
Business debt consolidation means replacing several separate loans from different lenders with a single loan, usually at a lower overall rate and with one monthly repayment. For businesses that have built up borrowing across different lenders over time, consolidation can reduce what the borrowing costs and make it considerably easier to manage.
How can I consolidate my business debts?
Consolidating business debt starts with getting every loan written down in one place: who it’s with, what the rate is, and what’s left to pay. Once that is clear, a broker or lender can assess what’s possible and at what cost. Getting that preparation done before approaching anyone makes a significant difference to the outcome.
What are the risks of consolidating business debt?
The main risks are early repayment fees on existing loans, which can reduce or eliminate the financial benefit, and the possibility that a longer loan term means paying more in total even if the monthly repayment is lower. It’s worth adding up the full cost of any new arrangement before committing, not just the monthly repayment figure.
Does consolidating business loans affect my credit score?
Applying for a consolidation loan will show on a credit file, and if existing loans are closed as part of the process that can also have a short-term effect. Over time, making consistent repayments on a single loan tends to improve a credit position rather than harm it. Missing repayments on a consolidation loan, however, will make things worse.
What if I can’t consolidate my business’s debts?
If consolidation isn’t immediately possible, the priority is stopping things from getting worse. That might mean going back to existing lenders to discuss revised repayment terms, or working with a broker who knows which lenders will look at more complicated situations. Taking advice early almost always leaves more options than waiting.
How long does business loan consolidation take?
It depends, but business loan consolidation can take 2 to 3 months, especially where there are more complex situations. It’s worth allowing enough time to compare options rather than accepting the first offer. Less complex situations will take less time.
Can I consolidate business loans with bad credit?
Consolidating with a poor credit history is possible in some situations, but the options are narrower and the rates available will reflect the higher risk to the lender. The starting point is always a clear picture of the full debt and a realistic view of what the business can afford to repay.
Is business debt consolidation the same as refinancing?
The two terms are often used interchangeably. Consolidation usually means combining several loans into one. Refinancing more often refers to replacing a single loan with a better deal. The end goal is the same: replacing existing borrowing with something cheaper or easier to manage.
Talk to us about your debt
If your repayments are starting to eat into money your business needs to operate, it’s worth getting everything laid out clearly before it gets harder to sort out. Get in touch to arrange a conversation.
Author
Written by Sean Hackemann, Director of Specialist Accounting Solutions. Team SAS works with ecommerce businesses at £1 million revenue upwards, providing fractional CFO and management accounting services focused on cash flow, strategic advice, and financial decision-making.
