Business Debt Consolidation Programs: 6 Structures and Who Runs Them

Many businesses can become overwhelmed with debt for a number of reasons. There are at least six common debt consolidation structures to help an overburdened business dig itself out: a bank or credit union loan; an SBA 7(a) loan made through a participating lender; an online lender loan, which can be faster to close; reverse consolidation, a new and larger advance from an MCA funder; debt settlement from a third-party agency that negotiates debt reduction with multiple lenders; and Subchapter V bankruptcy, in which a trustee helps you settle your debts and repay them under a court-protected repayment schedule. Both the bank or credit union loan, as well as the SBA 7(a) loan, require the borrower to meet some qualifications. Which one is best will depend less on what you want than on what you qualify for.

Some debt - like business loans - is relatively simple to consolidate. Other forms of debt - merchant cash advances, for example - aren’t so simple to consolidate. MCA or Merchant Cash Advance products are often structured as a sale of future receivables. Instead of paying interest, you agree to sell your receivables. So a $100,000 merchant cash advance with a factor rate of 1.30 means that $130,000 will be the purchased amount. Unlike a loan, there is no monthly payment to the MCA funder. However, if you have several MCAs, their daily collections - called debits - can consume much of your cash flow.

Consolidation Loans

Bank and credit union consolidation loans are the most traditional option for consolidation. The loan can be a term loan with an amortizing loan structure, with a set rate over a fixed period. To be approved, you must meet credit and financial qualifications. In addition, it’s not easy to get a traditional bank loan or credit union loan as a small business owner with poor credit.

A good alternative to a bank or credit union loan may be an SBA 7(a) loan made through a participating lender. According to the SBA’s website, the most these loans can be is $5 million. On the other hand, obtaining a 7(a) loan is a thorough process. In addition, there are some restrictions as to which debts can be repaid. For example, you can’t use a 7(a) loan to repay a merchant cash advance, except for under special circumstances. If your application is assigned a loan number on or after October 1, 2026, a new SBA SOP - SOP 50 10 8.1 - enters the picture. Any active MCA must first be converted to a term loan and amortized over a period of at least 24 months before refinancing with a 7(a) loan can take place. If you took out new advances, you are out of luck under this SBA rule. Like a bank or credit union loan, you’re still applying for a loan in the traditional sense. But by adding the SBA element to your loan, you’re also bringing with you the security of an SBA guarantee, which lenders can rely on for repayment in case you default. This helps lenders to offer better terms.

If you are unable to get a bank or credit union loan or an SBA 7(a) loan, another alternative is a debt consolidation loan through an online lender. Online lenders may be more lenient than traditional banks and credit unions when it comes to lending qualifications. That said, the rates offered by online lenders may be higher, too.

Reverse consolidation is also possible. Unlike a traditional consolidation loan, reverse consolidation is not a loan but another MCA product. Simply put, it is a larger MCA. An important factor to consider is that, because the advance you take out to cover your existing advances is larger, you can incur a higher total payout amount.

Debt Relief

What if you don’t qualify for debt consolidation under any of the options already mentioned? Debt settlement may be an option. It is a service provided by a debt settlement company, a third party that negotiates settlements with your business creditors. These third-party debt settlement companies are not lenders. Rather, their goal is to convince the creditor to take a percentage of the balance. Settling debts does not involve taking on new debt to clear the existing obligations. Instead, the arrangement may be to move daily withdrawals into a manageable payment plan. Here’s the catch - whether or not your arrangement with a debt-settlement company works out depends on the creditors taking part.

While working with creditors and getting some of the debt written off can be an effective form of debt relief, don’t be fooled. The IRS generally taxes forgiven business debt as ordinary income. The lender files a Form 1099-C to report it if the canceled debt was at least $600. If the borrower is insolvent or in bankruptcy at the time, Form 982 may exclude the forgiven debt from income (if insolvent, only up to that amount). But the excluded debt amount will reduce your tax attributes.

If none of the above options work for your business, there’s one more alternative: Subchapter V. For cases filed since June 21, 2024, the total debts cannot exceed $3,424,000. In every Subchapter V case a trustee is appointed to oversee and help negotiate the plan. No United States Trustee quarterly fees apply, and the plan is due within 90 days. The court will extend your plan beyond 90 days only if you can show the delay was through no fair fault of your own. A bill in Congress, H.R. 7730, would raise the limit to $7.5 million. Though passed in the House and Senate in mid-October of this year, the president has not yet signed it. So this change is not yet law.

The Total Cost over the Life of the Loan

The cost of consolidation is something to keep in mind, too. Compare the interest rate to what you currently pay and the total cost over the life of the loan. Watch out for origination fees, application fees, and early payment penalties. And be aware that a lower monthly payment can still end up costing more over time. In some states, lenders must provide a cost disclosure, including a term, payments, and an estimated APR. New York’s Commercial Finance Disclosure Law applies to advances of $2.5 million or less. California’s Senate Bill 1235 requires similar disclosures for amounts of $500,000 or less. These disclosures help make it possible to compare factor rates with loan interest.

To some, consolidation may seem like a quick fix for cash flow problems, but what got you there may not change as a result. Consider what the underlying issue with cash flow is, and whether the underlying problem will continue if you obtain financing. You may start out trying to fix your problems and find yourself needing more financing later. Finally, remember that just because you can consolidate your debt doesn’t necessarily mean you should.