How to Get a Small Business Debt Consolidation Loan

In this article, we discuss the steps you need to take to get a debt consolidation loan for your company. While the actual steps vary by lender, most lenders follow this process. We also discuss the documents that lenders request from you. This information will help you be better prepared for the application process and will help your transaction succeed.

To learn more about this subject, read “How does small business debt consolidation work?” – which describes the basic solution along with its advantages and disadvantages.

1. Initial loan consultation. Will the borrower qualify?

The first step that the underwriting team takes is determining if the borrower qualifies for consolidation financing. This consultation is done via a phone interview. Taking this step does not guarantee final approval. However, it gives the borrower a good idea of their chances for success. As part of this consultation, the lender asks you the following questions:

a. Have you ever defaulted on a federal loan?

In most cases, a default on a federal loan automatically disqualifies you from funding. Also, a default on a federal loan prevents you from getting SBA-guaranteed financing. Federal loans include items such as student loans and mortgages backed by Freddie Mac / Fannie Mae.

b. Have you had a personal or corporate bankruptcy?

A previous bankruptcy – personal or corporate – is not always a disqualifying event. However, a bankruptcy can become a problem if federal loans were discharged as part of the process. This issue is related to the previous question regarding federal loan defaults.

c. Is your personal credit 650 or better?

This question always causes confusion among borrowers. They are asking for a business loan – why does personal credit matter?

Personal credit matters because lenders see it as a proxy for how you will handle business finances. Lenders look at credit as a measure of “financial responsibility.” Note that your payment history for business loans is not reflected in your personal credit report.

d. Is the company making money?

Debt consolidation can help good businesses that made bad financial decisions. However, it does not help a company with a broken business model. If your company is not making money, you need to determine if the company will become profitable after consolidating its loans. If the business will not become profitable, debt consolidation is not the right solution.

e. How will you use the loan proceeds?

The most common use of loan proceeds is to retire old, high-cost debt. Additionally, you can use proceeds to cover the acquisition of new equipment and/or real estate. This topic is discussed in the next two questions.

f. Are you buying additional equipment?

As part of consolidating old business debt, you can also buy new equipment for the company. New equipment can help if you expect further growth.

Lenders view equipment acquisitions favorably since the new equipment strengthens your collateral position. Obviously, you should acquire new equipment only if it makes business sense.

g. Are you buying the building where your business is located?

As part of the debt consolidation process, you may also be able to buy the building where your business is located. This purchase can be a benefit in some circumstances. A building is an asset that may help your business. If you buy the building, the rental payment becomes an add-back which can help your financial position. Again, you should acquire the building only if it makes financial sense for your business.

h. Are your corporate and personal taxes filed and in order?

Lastly, your corporate and personal taxes must be filed and in order. Otherwise, your date of funding may be delayed.

2. Deliver documentation

The next step in the process is to collect the documents needed for due diligence. Most lenders ask for the following documents:

Personal items

  • Three years of personal returns
  • Personal financial statement for all owners
  • Form 1919

Corporate items

  • Three years of corporate returns (those listed in the K-1)
  • Most recent Profit and Loss statement and Balance Sheet
  • Previous 2-3 years of Profit and Loss statements and Balance Sheets
  • Corporate debt schedule. Lists all debt – needed for all entities
  • Equipment list, along with current market values
  • Projection of future sales (needed if the company is losing money)

3. Initial review of documents

Once the documents discussed in the previous section are received, lenders perform the initial review process. If the review step is completed successfully, your company gets a “Prequalification Letter.” This letter gives you an idea of the terms you will get – provided all the due diligence goes well. Note that the prequalification letter does not guarantee final funding. 

4. Formal due diligence

During the formal due diligence stage, the lender reviews and verifies the information you have submitted. At this time, appraisals are ordered for any equipment or real estate that you are also buying.

The lender also reviews your past taxes. This step helps uncover any potential transaction roadblocks. Lastly, the lender looks at any past lawsuits that could prevent the transaction from closing.

If this process is successful, your company gets a “Commitment Letter.” If you accept the letter, the transaction moves to the next stage.

5. Provide final documents

During this stage, the lender performs the last verification steps before funding the transaction. The lender checks all asset titles to ensure the transaction can proceed. If the transaction involves real estate, the lender also looks at potential environmental issues. At this time, you must also provide the lender with the original loan documents for loans you want to retire, along with a 12-month payment history.

Getting the 12-month payment history for all your existing loans may take some time. It’s best to start this process early. Also, self-generated payment reports (e.g., via QuickBooks) are not acceptable.

6. Schedule closing date

The last step in the process is to schedule the closing date. At closing:

  1. Documents get signed
  2. Lender releases funds to escrow company
  3. Escrow company disburses funds as required

Need more information?

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