Managing Small Business Debt


Debt is undoubtedly a useful tool when starting and growing your small business, and in reality, the vast majority of small businesses will rely on debt financing of some type. However, there’s a fine line between having debts that you can manage and debts that are spiraling out of control. Sometimes, all it takes is a single event such as a market downturn, a late payment from a customer, or a dip in sales to tip the balance.

Good financial management is about the little things. It’s about taking public transport to meetings rather than taxis and reducing costs where you can. The same can be said of managing small business debt. You need to keep a constant eye on the situation and take steps to prevent debt from snowballing out of control. 

What Steps can you Take to Manage Small Business Debt More Effectively?

(1) Create a rainy day fund

It’s impossible to plan for every eventuality in business, so just as in your personal life, it pays to have some savings you can dip into when you’re faced with unforeseen costs. If you have some money left at the end of the month, top up your savings fund and make sure there’s always a minimum amount in the account. That will reduce your reliance on a business overdraft and credit card to cover costs such as long-term staff illness and the breakdown of vehicles and allow you to take advantage of unexpected growth opportunities.

(2) Cut unnecessary spending

If debt is becoming a problem for your business, there are likely to be cost-cutting measures you can take that will not impact your ability to run the business effectively. That could include canceling a weekly cleaning service, reducing the amount you spend on office supplies, making non-essential members of staff redundant, and meeting clients in coffee shops rather than hiring meeting rooms. You’ll be able to revert to your regular spending habits once your debt is under control.  

(3) Increase your revenue

There could be a number of relatively simple ways to increase your revenue that you’ve overlooked. For example, something as simple as offering an early payment discount to your customers could lead to a short-term cashflow injection. Alternatively, if you’re not using all of the available space in your business premises, you could consider subleasing the unused square footage to raise additional income or downsizing to lower your rent. On the other hand, if you have a method of marketing your business that’s proven to generate results, increasing your marketing spend temporarily will lead to an upturn in sales.  

(4) Consider refinancing

If you have a business loan that you’re repaying at higher than the current market rate of interest, consider refinancing in favor of a loan with more manageable monthly repayments. If business loans aren’t available at lower interest rates, make paying off loans with the highest interest rates a priority. You should pay off any debts that you have provided a personal guarantee for first. That will ensure your personal assets are not at risk if the business defaults. 

(5) Negotiate with suppliers

Do not hesitate to negotiate with suppliers and ask for discounts when you place bulk orders. You could use lower quotes from other suppliers as leverage or draw on your history of making prompt payments to negotiate more flexible or extended payment terms. You could also consider teaming up with another small business to make bulk purchases at lower prices.  

(6) Manage and boost your credit score

Your ability to qualify for business credit of any kind, whether it’s a business credit card, a small business loan or a property or equipment lease, will depend on your business’s credit rating and history. The better your credit history is, the easier it’ll be to secure finance and the lower the interest rates you’ll have to pay.

Taking steps to increase your credit score may not reduce your debt repayments now, but it will help you access more affordable credit in the future.

Tips to increase your credit rating include:

  • Check your credit report: Obtain your business’s credit report from major credit reporting agencies such as Equifax and Experian. That will provide information to help you raise your score and show you which accounts are negatively impacting your report.
  • Reduce your credit utilization rate: Keep your credit utilisation rate, that is, the amount of credit you use in relation to the amount of credit available, at less than 15 percent.
  • Create more positive credit events: Establish credit accounts with suppliers to increase the number of positive payments on your file.
  • Add successful payment experiences manually, if necessary: Not all vendors and suppliers share payment data with business credit-reporting agencies. However, you can add positive payment experiences to your credit file manually by contacting the agency.
  • Make sure your details are accurate and up to date: It’s important to make sure the details on your credit file are accurate and up to date. If you see something that’s on your report and shouldn’t be there, give the credit agency a call to dispute it.

(7) Raise funds to repay your debts

It’s not always easy for an indebted business to raise funds as investors will typically view a business that’s free from debt as a better investment proposition. However, there are still several options open to you:

  • Borrow from family and friends: Borrowing money from family and friends can give you access to funds at favourable rates that you would not receive from the bank. However, it can also put a strain on your personal relationships, so it’s something you should think about very carefully.
  • Realise company assets: Selling non-essential company assets could be an effective way to raise funds to repay your business’s creditors.
  • Seek investment: Opening up the business to new investment could be an option for your business; however, the presence of debt means investors are likely to want more of your business for their money.