The Smart Business Guide to Managing and Leveraging Debt

Business debt might seem like a necessary evil for your small business, but it doesn’t have to be scary. In fact, debt can be a useful tool for small business owners who know how to manage it wisely.

These debt management best practices will empower you to take charge of your finances and drive your business to new heights. 

1. Evaluate your debt load.

When was the last time you took a deep dive into your business’s debt? Just like revisiting your favorite business book can reveal new insights, regularly reviewing your debt load can uncover opportunities for better financial management. Make it a quarterly ritual: By checking in regularly, you can adapt quickly if something in your financial landscape shifts.

Here’s how: Start with a simple spreadsheet or your favorite financial software and list every debt—big or small. Note each debt’s interest rate and due date. By keeping track of these details, you gain a bird’s-eye view to spot which debts need your attention first and which can wait a bit. 

Smart Metrics for Smarter Decisions

Let’s get practical with some key metrics, like your debt-to-income ratio, which lets you see how manageable your debt is. The higher this ratio, the riskier it will be for your business to take on more debt. Another useful ratio is your debt-service coverage ratio, which compares operating income to debt payment obligations. You want a higher ratio here: It means you’re generating enough income to comfortably cover your debt payments. 

2. Establish a debt repayment plan.

Creating a solid debt repayment plan is a lot like planning a successful road trip. You need to map out the best route to make sure you’re navigating the busiest cities during off-peak hours (akin to paying off your highest interest debts on this debt repayment journey). By focusing on high-interest debts, you minimize your total interest paid, making your financial journey more efficient.

Here’s how: Begin by listing all your debts along with their interest rates. Prioritize paying off those with the highest rates first while maintaining minimum payments on others. This method, often called the avalanche method, reduces the amount you’ll pay in interest over time. This frees up more funds for further debt reduction or other business investments.

Take the Boost-Your-Budget Challenge

Here’s one way to supercharge your debt repayment: Challenge yourself to increase your payment amounts by a small increment every six months. As your business’s financial health strengthens and your cash flow improves, scaling up your payments in this way will help you cut down your debt even faster.

3. Consolidate debt.

Debt consolidation can feel a lot like pressing the reset button on your business finances. By combining multiple loans into a single loan with a lower interest rate, you reduce your monthly payment burden. This more manageable debt package can streamline your financial management.

Here’s how: First, identify debts with the highest interest rates—these should be your top candidates for consolidation. Compare the interest rates and terms available for consolidation loans through different lenders to find the best offer. 

The Essential Debt Consolidation Checklist

Before you consolidate, run through following checklist:

• Check your credit score. It affects the interest rates you’ll qualify for.
• Review existing loan terms. Look for any prepayment penalties.
• Calculate total costs. Make sure consolidation gives you a net benefit.
• Plan for new payment schedules. Adjust your budget accordingly. 

4. Negotiate with lenders.

It may feel awkward the first time you reach out to ask about better loan terms with a lender, but think of it as simply having a friendly conversation where both sides are aiming for a win-win outcome. You’re not there to ask for favors. Instead, you’re showing how lowering your interest rate or extending a repayment period makes your financial load more manageable, ensuring your ability to make steady, reliable payments—a scenario that lenders like as it reduces their risk exposure. 

Here’s how: Gather all your financial statements and loan documents to determine which terms you realistically can and should renegotiate. During your conversation with your lender, explain how these changes not only benefit your cash flow but also reduce the risk of financial distress that could hurt your ability to meet your payment obligations. Remember your goal: Making a compelling case of mutual benefit that will be hard for your lender to resist.

Your Negotiation Prep List

During your prep stage, jot down your top negotiation points. This list is your cheat sheet—it keeps you focused and sharp during talks. Include how each point benefits both your business and the lender, such as a lower interest rate that can lead to more disposable income for consistent payments. 

5. Monitor cash flow.

By keeping a close watch on your cash flow, you’re not just counting dollars and cents. Close monitoring means you’ll always have a clear picture of where your business stands financially. This ensures you always have the cash on hand to cover your obligations, and it gives you invaluable insight for making more informed decisions.

Here’s how: Choose a tracking method that fits your business style, whether it’s a traditional spreadsheet or financial software like QuickBooks or FreshBooks. Schedule a regular time to go over your income and expenses—make it your Monday morning ritual, for example—and don’t forget to include time for reconciling your numbers with your bank statements. 

Build a Contingency Plan

A good cash flow management strategy requires more than keeping an eye on today’s numbers. You also want to be ready for tomorrow’s surprises. That’s where a solid contingency plan comes into play. Start by building an emergency fund—set up regular payments into the fund to grow it consistently. And make sure you’ve negotiated flexible repayment terms with your lenders, so if cash gets tight, your payments can adjust to a more manageable level.

6. Maintain a good credit score.

A high credit score unlocks doors to cost-effective financing options. And don’t just focus on your business’s credit score—keep an eye on your personal score as well, since lenders may evaluate both when considering loan applications from small businesses.

Here’s how: Make a habit of reviewing both your personal and business credit reports at least quarterly—you can access your reports for free as frequently as once a week. Use this time to check for any inaccurate entries that could drag down your score, such as incorrect account details or fraudulent activities. This routine not only helps you catch discrepancies early, it also keeps you intimately familiar with the factors influencing your scores.

Credit Score Cleanup Guide

If you find discrepancies in your credit report:

1. Document the error. Keep copies of any paperwork or digital records that prove there’s a mistake.
2. Make your case. File a formal dispute with the credit bureau that issued the report. Each of the three credit reporting agencies (Transunion, Experian and Equifax) let you file your dispute online. 
3. Track the process. Be sure to follow up to ensure the error is corrected and that this correction is reflected in your updated credit report. 

7. Explore diverse financing options.

By diversifying your financing, you’re building a multi-layered safety net for your business. Mix it up with a combination of financing sources—for example, traditional loans, grants and perhaps some venture capital. This spreads your financial risk across various lenders. Plus, more options mean more opportunities to find repayment terms that mesh well with your cash flow scenario.

Here’s how: Start by researching various financial products and lenders. Don’t just stop at banks—check out other options too, such as microloans, online lenders, and even crowdfunding platforms. Each offers unique advantages that could play a key role in your financing toolkit.  

Avoid These Financing Faux Pas

No matter which financing options you choose, be cautious of overextending your financial commitments and always, always read the fine print. Understanding the terms and conditions of your financing arrangements, including interest rates and repayment schedules, helps you choose the best option for your business’s needs and reduce the risk of unwelcome surprises down the road.

8. Use debt to grow strategically.

Debt doesn’t have to be just a financial burden. Used strategically, it can be a powerful tool for turbocharging your business’s growth by providing you with the funds to explore new markets or beef up your capabilities. The key: Make sure any debt you take on fits into your bigger business picture without overwhelming your financial resources. 

Here’s how: Evaluate your expansion plans carefully—what will you need money for, and how much? Scout out the best financing options, and always sync your borrowing with your business’s capacity to manage debt. This means looking at your repayment terms closely and ensuring they align with your expected cash inflows.

Responsible Borrowing Checklist

Reflect on the following questions to stay in control of your plans to borrow for growth:

• Understand your terms. Know what you’re signing up for with interest and repayments. Can you handle the repayments without sweating each month?
• Purpose-driven borrowing. Are you clear on how this money will actively drive growth?
• Goal alignment. Does this debt mesh with where you see your business going?
• Risk readiness. Have a clear understanding of potential risks and how you’ll tackle them. What’s your plan B if the market doesn’t play along?

Next steps: You’ve started your journey towards better debt management. Ready to dive into more strategies to help your business grow? Sign up for Small Biz Ahead for financial strategies and insights to stay informed and keep building on your foundation.