Business Debt Management: What You Need to Know

The average US small business owner carries $195,000 of debt, according to a study by Experian. While some debt is necessary to run a successful business, expensive or excessive debt can crush your cash flow and even put you out of business. Here’s what you need to know about business debt and how to manage it.

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What is Business Debt?

Debt is money owed by one party to another. When you started your business, you might have needed to take out a loan for working capital, equipment, inventory or payroll. Forms of debt can be a loan from a bank, carrying a credit card balance, money borrowed from family and friends, and more.

However, if debt is negatively affecting your bottom line, there are ways to reduce it. Read on for ideas about how to eliminate expensive debt.

Tips to Help Eliminate Business Debt

Understand your current financial situation

The first step to getting a handle on your business debt is to understand where you stand. This can help you move forward and eliminate stress from being in the dark. Here are questions to ask to help you asses your financial situation:

  1. How are your profits?
  2. How much are you spending on inventory?
  3. How much are you making on products sold? (gross margin)
  4. How much money is left over?
  5. What’s your debt situation?
  6. Are your products selling?
  7. Do you have an emergency fund?

For a deep dive into each question and how to calculate the answers, visit the Bench Accounting blog: How to Know if Your Business is Financially Healthy.

Rework your budget

Your budget should be a “living document”. That is, it should evolve as market conditions change and other factors affect income and debt obligations. A budget takes a bit of time to set up and calculate but is important for financial management and business growth.

With the right template, this process can be easier and faster than you might imagine. Here’s a resource to get you started: Small Business Budget Templates for Download.

Cut costs & reduce expenses

This strategy can be difficult for a small business operating on a shoestring budget. However, there are tons of little expenses that add up. Reducing these obligations can be painless.

Here’s an article on cost cutting to help you manage debt: Don’t Forget These Sneaky Expenses When Starting Your Business. You’ll get information on how things like credit card processing and utilities can add up – and what you can do about it.

Reach out to creditors/lenders

Reach out to creditors and lenders to discuss a lower interest rate or an extended payment period. If you have a bank loan, you may be able to get more favorable terms or rates if you haven’t been late on payments and your business financials are in order.

For credit cards, you can consolidate and transfer balances to lower interest cards. If you’re going that route, be sure to keep an eye out for the dates that special offers end. Your interest rate can spike significantly.


Contact customers

If you offer a service, customers might let invoices go unpaid for an extended period of time. You don’t need to be aggressive or unfriendly when you ask customers to meet their payment terms. However, if a few weeks go by, call and ask for payment. If late paying customers are affecting your bottom line, you may want to add a late fee clause to agreements.

Consolidate loans

Consolidating high interest debt into a lower rate loan can be a huge money saver. In fact, SmartBiz customer Milton Martinez used this strategy by taking out a low-cost SBA loan. HE says, “By getting rid of two small loans I’m saving $15,000 – $18,000 dollars. That’s money I can put back into growing my business or into savings.”

Learn more about debt consolidation with an SBA loan on the SmartBiz Loans website: Refinance high interest debt and save thousands with a low-cost SBA loan. For more information about consolidating loans, review this post: Small Business Debt Consolidation Strategies.

Note that a good credit score is required. If you need to work on yours, the SmartBiz blog has a wealth of information. Visit the SmartBiz blog here for articles about personal and business credit and how they affect loan applications.

Increase your income

Believe it or not, there are only four ways to increase your revenue:

  • Increase the number of customers.
  • Increase the average transaction size.
  • Increase the frequency of transactions per customer.
  • Raise your prices.

If you need assistance with any of these strategies, consider hiring an outside marketing professional. They can help develop a solid road map to increase your customer base and overall revenue.

Not All Debt is Bad Debt

Note that business owners don’t need to completely avoid debt. They need to embrace the right kind of debt that can help their business expand and save money. For more information, review this article from the SmartBiz Small Business Blog: Debt Can Be Good for Your Small Business.

See Where You Stand

If you’re seeking a low-cost SBA loan, it’s a great idea to know where you stand before you apply. SmartBiz Advisor is an easy-to-use online tool specifically designed for those interested in a low-cost SBA loan.

Just like a CFO in a large business, SmartBiz Advisor can help you learn how to build your lending profile by educating you about financial factors banks consider. SmartBiz Advisor generates your unique Loan Ready Score and offers suggestions to improve your score if needed.