6 Strategies to Help Manage Small Business Debt

Knowing how to manage debt is part of everyday life for many small businesses. There’s nothing wrong with small business debt if you’re borrowing to improve your business’s future profitability. Small business owners might choose to borrow money to invest in new product development, expand into new markets, or handle ongoing costs of doing business. 

Small business debt can also have common touchpoints with your personal debt and personal credit score. Sometimes small business owners, especially if they’re sole proprietors without employees or a complex business structure, will use their personal credit cards to borrow money for business expenses. Other small business owners may personally guarantee their business loans. This makes managing and reducing small business debt even more important, because it could affect your personal finances and your personal creditworthiness. 

If your small business runs up against tough times like a drop in revenue, industrywide slowdown, or a recession, finding the right way to manage debt can be more difficult. But even during cash flow shortfalls, you can take action to manage debt for your small business. 

We’ll offer a deep dive into how people like you can manage small business debt. We’ll look at five actionable strategies to manage debt for your small business. Even if your small business isn’t currently generating enough revenue or you’re having a hard time making debt payments, know that you still have many good options. You can get several types of help with small business debt by reworking your debt payments with your lenders, finding debt consolidation options, and more. We’ll show you strategies that could get your small business (and your personal finances) to a better place.

First: Understand What Kind of Small Business Debt You’re Dealing With 

Businesses borrow for many reasons, both specific and general. If you’re a sole proprietor, your small business debts might be simple, unsecured debts—like using personal credit cards to pay for business expenses. If you have a brick-and-mortar business like a restaurant or retail store, you might have more complex types of secured debts that use business assets as collateral, such as small business loans for equipment or inventory.

Unsecured business debt

For unsecured debts, how much you can borrow and how much you pay in interest will be based on the credit score and creditworthiness of the business or the business owner. Examples of unsecured business debts include: 

• Small business credit cards. Many small business owners start out borrowing on personal credit cards. If you have a legal business entity like an LLC, you can apply for a business credit card in the business’s name. 

• Small business line of credit. If you qualify based on business credit history, this type of unsecured business debt tends to offer a lower APR than a credit card. 

Secured business debts  

Secured small business debts are backed by collateral, such as business vehicles, equipment, or real estate. Examples include: 

• Equipment loans

• Inventory financing 

• Commercial real estate loans 

• Invoice financing 

• SBA loans, which are backed by the government’s Small Business Administration, and are often secured debts from private lenders. 

Before you decide on a debt reduction strategy, know what kind of debt you’re dealing with. Some debt relief strategies can only be used for certain types of small business debt—such as a sole proprietor negotiating a debt settlement offer for personal credit cards. Getting relief for hardship with secured business debts will typically require you to work out an arrangement with your lenders. 

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Small Business Debt Warning Signs

You might be wondering how  you know when your small business has too much debt. There’s no one right answer for every business. But some small businesses get overwhelmed with too much debt and not enough cash to pay the bills. 

Here are a few possible early warning signs of small business debt trouble: 

• Weak cash flow patterns. If your business isn’t earning enough revenue to comfortably cover your expenses and meet your net income goals, this could lead to trouble with paying off business debt. 

• Low Debt Service Coverage Ratio (DSCR). The DSCR is a business credit metric similar to the debt-to-income ratio for personal loans. To find your DSCR, take your business’s net operating income and divide it by your total annual debt service (debt payments). SBA lenders typically want a DSCR of 1.25 or higher. For example, if your business has net operating income of $200,000 and you’re paying $100,000 of debt per year, your DSCR is 2.0, which is good. If your debts are creeping higher compared to your business income, that could be a warning sign of financial trouble on the horizon.  

• Needing to borrow more money and unable to get approved. If your business is already struggling with cash flow or high existing debt levels, this could mean you’ll be turned down for additional loans. 

If you’re seeing some small business debt warning signs or even if you just want to strengthen your business balance sheet before you apply for a new business loan, the following strategies could help. 

Debt Strategy #1: Create a Budget

Whether you’re comfortably paying your bills or if you’re considering getting help like debt relief, creating a budget is the key. Setting a budget for your small business could help you identify exactly how much debt you owe and how much cash you have to pay it off each month. To create a budget, follow these steps.

• Add up your revenue. List and add up all your revenue sources to figure out how much revenue you generate each month. If your revenue varies, calculate the average.

• Subtract your fixed costs. Your business’s fixed costs are the same each month and may include rent, supplies, payroll, taxes, and insurance. Tally them up and subtract them from your revenue.

• Subtract variable expenses. Variable costs change over time. These could include office supplies, utilities, advertising and marketing, or any unexpected one-time business expenses. Once you come up with an average monthly variable cost, subtract that number from your revenue as well.

• Determine how much you can allocate toward debt. The number you get after subtracting fixed and variable costs from your revenue should give you an idea of what you can put toward debt each month. 

There’s no universal answer for how much money to put toward small business debt each month. Understanding the full picture of your small business’s monthly cash flow, expenses, and overall budget will help you make better informed choices on how to manage debt. 

Debt Strategy #2: Reduce Costs

The less money your business spends, the more cash you’ll have available to help manage debt. That makes it a good idea to take a close look at your business expenses and figure out which ones you can reduce or completely eliminate. Here are some suggestions.

Rent payments

Right-sizing your office space or other business facilities could be an easy way to save money. If your office space is too big or you could get by with a smaller space, consider moving to a location with more affordable rent payments.

Negotiate with suppliers

Don’t be afraid to reach out to suppliers and negotiate better deals. If you have a track record of making timely payments or buying in bulk, suppliers might give you a discount or offer more favorable payment terms that could improve your cash flow. 

Clear out unneeded equipment and subscription costs

Many small businesses, without realizing it, end up paying for a few extra subscriptions, software licenses, or pieces of business equipment. As part of your cost-cutting efforts, take a fresh look at how much you’re spending each month on these ongoing costs. And look for opportunities to sell extra business equipment or other unused assets. 

Outsource non-core functions

Another big part of cost-cutting for small businesses is re-evaluating how much you spend on certain business functions and skill sets that might not be core to your operations or essential to your success. For example, you may not need a full-time marketing department at your company—it’s possible you could get the same results by hiring contractors. 

Bring some functions in-house

Outsourcing is not always the answer. Sometimes, small businesses can save money by doing the opposite, and making some roles internal full-time jobs. For example, some companies might find that they’re spending a lot of money on paying commissions to recruitment firms. Hiring a full-time talent acquisition manager to work in-house at your company might save you money. 

Share with other small businesses in the area

Other small businesses in your industry or local area might be looking for cost-saving ideas. Reach out to other small business owners in your network, or via business associations, and look for opportunities to share office space, band together for purchasing supplies, or work as a team for other cost-saving strategies. 

Get up to date with marketing and communications practices

You could spend less by swapping billboards and print ads for targeted, cost-effective digital marketing solutions. If your business is still using landlines for phone service, this could also be an easy target for cost cutting. Take a fresh look at your business’s everyday communications tools and marketing efforts, and think about how you could change them to cut costs.

Ensure employee efficiency

Increasing the productivity of your team could drastically lower your cost of doing business. To make sure your employees are productive and efficient, use software to track the way they spend their time. You could also set deadlines and schedule predetermined time blocks for meetings. 

Reach out to your employees for ideas for how they could do their jobs better. Trying to remove obstacles and rework your company’s processes to reduce inefficiencies could make everyone’s life at work easier. 

Debt Strategy #3: Increase Revenue

Think about ways you could increase your short-term revenue. Boosting your top-line revenue could help you manage debt by increasing your debt payments, and it’s helpful in the long run by shifting your business in a better direction. A few revenue-generating strategies might include the following. 

Offer a special sale

Get creative about giving customers a new, timely reason to buy from you. Maybe you can offer a seasonal sale or a holiday special. You could give your customers a discount if they buy before the end of the month or the current quarter. Think about how to accelerate revenue by getting people to buy sooner. 

Up-sell or cross-sell

Look for opportunities to sell more products and services to the same customers. Perhaps you can create a package of products or services that meets multiple needs for the same buyer. Encourage more customers to upgrade their purchases with premium offerings. Or get people to buy multiple categories of products or services at the same time. 

Offer special deals for high-value customers

Think about who your biggest and best customers are, and how you could get them to spend more money with your business. Sometimes when you need to boost sales and increase cash flow, it pays to go deeper into your best customer relationships. Offer a discount if a customer increases their purchase volume, or find out if you can cross-sell a new product to an existing customer who loves one of your other products. 

Offer incentives like free shipping or complimentary consultations

Customers love getting value-added services and bonus incentives. Think creatively about how you can make your offerings more attractive by throwing in some fun, valuable incentives. 

Launch a customer loyalty program

Try to drive more repeat business by giving your customers an incentive to keep buying from you. This could be as simple as a coupon to buy 10 lunches, get one free at your restaurant, or a more sophisticated loyalty program where you give a discount or offer value-adding incentives based on total purchase volume per year. But whatever model is right for you, think creatively about how your business could drive more sales by incentivizing your inner circle of loyal customers.  

Create a customer referral bonus

One of the best ways to find new customers is by asking for referrals from your existing customers. Some of the best sales opportunities come from word of mouth. Offering a customer referral bonus could accelerate that word of mouth. Be innovative and generous: the cost to your business may well be worth it if one of your best customers spreads the word and gives you five or 10 new sales opportunities.

You could also combine your customer referral bonuses with other customer loyalty programs and incentive offerings. Make it worth your customers’ time, and they’ll be more likely to give you referrals. 

It’s not always easy to increase revenue quickly, but with some planning and creativity, you could set yourself up for longer-term growth.

Debt Strategy #4: Small Business Debt Consolidation Options

Just as some people can qualify for a personal debt consolidation loan to help pay off higher-interest credit card debts, small business owners could use debt consolidation as a debt reduction strategy. If your business is currently making payments on several different loans or high-interest business credit cards, you might want to look for a small business debt consolidation loan. 

Here are a few details to know about small business debt consolidation loans:

What is a business debt consolidation loan? 

A business debt consolidation  loan lets you combine other existing business debt payments into one loan, possibly at a lower interest rate. Business debt consolidation loans could help your business save money on interest and simplify your business finances. 

Some business debt consolidation options are: 

• Business consolidation loans. This business loan gives you a lump sum of cash upfront in order to pay off and refinance your other business debts. These are typically longer-term loans (such as a five-year term) with a fixed interest rate. 

• Business credit card balance transfers. Just like some people use this method to pay off personal credit card debt, business credit card balance transfers could be used for business debt consolidation. Be aware of fees, and only do this if the new business credit card gives you a significantly lower APR than your existing credit card. 

• Reverse consolidation. This strategy pays off merchant cash advances, which can be risky and mean high-interest debts for small businesses. With reverse consolidation, you could work with a lender to pay off your merchant cash advances over a longer-term time horizon, freeing up cash flow for your business.

Where can you get a business debt consolidation loan? 

You can apply for small business debt consolidation loans through banks, credit unions, and non-bank lenders such as online lending platforms. Some SBA loans can also be used for debt consolidation and refinancing business debt.

To qualify for a debt consolidation loan for your small business, banks typically prefer to lend to businesses that have been established and operating for a few years. If your business is newer  and has less-than-perfect credit, you might get better results from non-bank lenders. 

What are the pros and cons of business debt consolidation loans? 

Ideally, a small business debt consolidation loan should help your business with these advantages: 

• Save money on interest—business debt consolidation options should hopefully reduce your interest rates and save money on total interest paid

• Give you extra breathing room in your day-to-day cash flow 

• Improve the flexibility of your business finances 

But there are a few risks, too. Business debt consolidation can bring a few potential disadvantages: 

• End up with more total debt. If you replace higher-interest debt with a lower-interest debt consolidation option, but then your business struggles to repay the new loan, you might just end up with more debt.

• Stay in debt longer. Debt consolidation loans might keep your business in debt longer than you would’ve been otherwise.

• Replace unsecured debt with secured debt. Be careful when choosing secured loans for consolidating unsecured debts (like business credit card debts): you don’t want to risk losing business assets or personal assets in case you can’t repay the new loan.

Debt Strategy #5: Reach Out to Creditors and Lenders

If you’re having trouble making the payments on your small business debts, especially if you’re a sole proprietor who’s paid for business expenses on personal credit cards, you might want to consider credit card debt relief. Before you fall behind on your bills or consider a debt settlement program, contact your creditors and lenders to ask about other options. 

Small business lenders will often be willing to do a small business loan workout, where they work with you to figure out a new path forward for your small business debt. This could include restructuring your loan, changing your minimum payment amount, deferring payments, or finding other ways to make your business loan more affordable. 

Remember: small business lenders want your business to succeed, because that means they’ll get paid. They don’t want you going into business bankruptcy. Talk to your lenders and creditors early on, before you miss loan payments or fall behind on bills. You could boost your chances of getting a favorable loan workout solution for your business debt. 

Here are a few items to prepare for your small business loan workout conversation with creditors and lenders: 

• Your business financial statements. Be ready to offer details about your business income, cash flow, expenses, and other balance sheet information.

• Your business collateral. If you already have a secured loan for your small business or you want to offer new collateral for a new loan, be prepared to show the value and advocate for the value of the assets. If your collateral’s value has increased, this could help you get a better deal on a worked-out loan. 

• Your preferred options. Think about what type of new loan, reworked financing structure, or debt relief options you want to negotiate. Perhaps you want a new loan with a longer term, or just a few months’ of deferred payments. The lender might give you exactly what you want, but you need to know what to ask for.

Your creditors and lenders may also offer credit card forbearance or other hardship programs that could give you a reduced interest rate or extension on your payment deadlines. In some cases, hardship plans require that you write a letter that outlines your financial situation and shows why you need assistance with your debt.

Debt Strategy #6: Get Customers to Pay Sooner

Another good strategy to improve your business cash flow is to get paid by your customers faster. The longer your payment terms are, the longer it’ll take for you to get paid and reduce your debt. So your goal should be to motivate customers to pay sooner. If your business accepts long-term payment plans or late payments, you may want to modify your payment terms. 

For example, inform your customers that your payment terms are changing to net 30 days instead of net 90 days. You can also offer early payment discounts or charge late payment penalties.

Even if your small business is experiencing slower sales or rising costs, you still have control over how to manage debt. By following these five tips, you can stay on top of your small business finances and put your company on a stronger footing for future success.

How Your Business Debt Could Affect Your Personal Assets 

As a small business owner, your personal finances are ultimately tied to the success of your business. And small business debts often have an effect on your personal finances, too. Just because a credit card or business loan is under the name of your business doesn’t mean a business loan is free money that you’re not personally responsible for repaying. 

Many small business loans and credit accounts require the business owner to personally guarantee some or all of the borrowed money. Even if your business fails, that doesn’t mean you’re off the hook for the business debts. Some business structures, like a limited liability company (LLC) or corporation, are intended to protect the owner’s personal assets from the worst-case scenario risks of being in business. But setting up an LLC or other corporate entity is not a magic wand. If you intermingle your business and personal finances, no business entity will protect you.

The biggest mistake you can make with small business debt is to mix your business and personal finances. Paying personal bills with a business credit card, buying groceries with a business bank account, or using a personal credit card for business expenses could all cause you to lose the liability protections of a business entity. 

Need More Help to Manage Debt for Your Small Business?

Small business owners tend to be independent-minded, highly motivated, hard-working people who may have a hard time asking for help. You might be tempted to try to solve your business debt challenges by yourself. But sometimes going it alone isn’t the best solution for small business debt. 

Here are a few signs that DIY strategies for small business debt reduction aren't enough. You: 

• Have been rejected for a business loan 

• Are losing sleep about business debt 

• Are falling behind on business debt payments 

• Put business expenses on personal credit cards

• Are worried that your business debt is becoming unmanageable and you might go out of business 

You don’t have to struggle through this alone. Professional help is available to get your business the debt relief you need. Small business debt settlement is not the same as debt settlement for personal loans. Well-established small businesses that have employees or use corporate entities to get business credit cards and business lines of credit will often need to work directly with lenders to find a debt workout plan or restructure their debts. Professional debt relief companies like Freedom Debt Relief can’t help with these types of purely business debts. 

If you’re a sole proprietor (with no LLC or other legal business entity) who has used personal credit cards for business purposes, or if you have other personal unsecured debts that are putting pressure on your business success, a professional debt settlement company could help.

Small business owners might want to consider a few types of professional help for debt relief with personal credit cards and other qualifying debts: 

• Consumer credit counseling. Nonprofit credit counseling agencies can help you work with your creditors to create a debt management plan for personal credit card debts, making it easier to pay off your debts over time. Getting lower payments on your personal credit cards could help relieve your financial stress so you can focus on making your business more successful.  

• Debt settlement. Professional debt settlement companies like Freedom Debt Relief can negotiate with your creditors on your behalf to pay off personal credit cards and other qualifying unsecured debts for less than you owe. This could help you save time and money so you can focus on building your business. 

• Bankruptcy. Some small business owners might get to the point where filing bankruptcy is the best available option. Talk to an attorney about your choices. Even after declaring bankruptcy for a failed business, you still might be personally liable for unpaid debts in some situations. 

No matter which option you choose for small business debt reduction strategies, take action right away. Don’t let the situation get worse. The sooner you talk with creditors, explain your business financial challenges and future hopes, and try to find solutions, the more likely you are to get to a better place. 

And remember that professional help is available from companies like Freedom Debt Relief if you have personal debts that qualify for our debt settlement program. Our Certified Debt Consultants could help you find a path to a better financial future. Request a free consultation now.