Your Debt And You - 4 Tips for Managing Your Small Business Debt

October 14, 2022

You've got your startup running and you're beginning to see real progress with your cash flows. But what about that heavy debt hanging over your business? Is now the time to start paying that down and getting free of your burdensome liabilities.

Of course, accruing debt is a common part of the process when you build a business. You need to secure funding &#151 loans and other debt options give you the chance to jumpstart your expansion. However, over time, this overhang can hold your company back.

Given that reality, it’s important to seize opportunities to pare down (or even eliminate) your debt when they come. But how can you do that? Here's an overview of your options and how you can use organization and planning to get your small business out of debt.

Debt and Your Small Business

Securing capital is a key part of growing your business. Statistics show that about a third of small businesses reach the brink of collapse (or fail altogether) because of a lack of capital. You don't want to be part of that group &#151 making it crucial to have the right funding in place to weather all potential emergencies and to capture any opportunities that come your way.

The last few years have made this abundantly clear. COVID forced many companies to add debt in order to make it through the pandemic. A report published in 2021 showed that 79% of firms had debt outstanding, up from 71% in the pre-pandemic days of 2019.

The same survey showed that small businesses have increased their debt load in recent years. Before the pandemic, 31% of companies had debt of more than $100,000. By 2020, that number had risen to 44%.

Small businesses have increased their debt load in recent years. Before the pandemic, 31% of companies had debt of more than $100,000. By 2020, that number had risen to 44%.

Still, those figures suggest that a majority of businesses carry less than $100,000 in debt. That manageable figure means that once cash flow turns in your direction, you can begin thinking about reducing your debt load.

Tips for Managing and Repaying Debt

Cutting your debt comes with several benefits. You eliminate the debt service costs, limit your liabilities, and reduce your risk. At the same time, you open the door for future borrowing, if a potential opportunity comes your way.

That said, you don't want to be hasty about your debt reduction plan. Each dollar you use to pay off an outstanding liability could potentially be used somewhere else. You want to weigh your desire to slash debt with the possibility for funding further expansion.

With that in mind, here are some tips to consider as you look at cutting your debt:

Make a Plan

Don't try to improvise your way out of debt. Rather, take time to review your current situation and understand the implications of your current debt load. (We'll talk in a moment about the importance of a debt schedule in this process.) From there, you can focus on the most high-value debt reduction moves, letting you optimize your resources.

Avoid Taking on New Debt

This might seem obvious, but it sometimes helps to make the obvious explicit. You won't lower your debt load by taking on new debt. As such, your first step will be to make sure that you have the resources you need to survive without further financing.

Look for Lower-Cost Debt

Saying that you shouldn’t increase your debt isn't the same as saying you should completely abandon any consideration of potential loans or other similar transactions. There are targeted financial moves you can take to improve your debt situation.

For instance, if you can pay off high-cost credit card debt by taking out a lower-rate loan, you might consider the switch. Don't increase your overall debt load. But stay open to options that improve your overall position.

Control Costs

Reducing debt assumes the health of your underlying operations. Without positive cash flow, you can't afford to route funds towards repayment. As such, take the necessary steps to keep your business as profitable as possible. This will limit the demands on your excess cash and give you the resources you need to cut the amount you owe.

Use a debt schedule to get your debt under control

To start your debt reduction plan, you have to have the right information. That means getting an accurate picture of what you owe. That's why a debt schedule becomes a crucial tool.

What is a debt schedule?

Think of a debt schedule as a way to organize the amounts you owe. Fundamentally, it exists as a list of your outstanding liabilities. It allows you to see pertinent information about any loans, leases, notes, or other forms of debt you might have.

You can use it to quickly review data like:

  • Original Amount
  • Amount Remaining
  • Maturity Date
  • Interest Rate
  • Payment Amount
  • Due Date

How a debt schedule can help your small business

Creating a debt schedule offers significant benefits to your small business. It requires some effort to build the document and keep the data current. However, you draw substantial value from doing so. Here are some of the ways a debt schedule will help you, especially as you look to reduce debt:

  • Stay Organized: Think about the value you receive from other financial documents, like balance sheets and profit/loss statements. A debt schedule falls in the same category. It gives you a tool to keep your finances organized.

  • Target Your Debt Repayment: Once you have all the information in front of you, it gets much easier to craft a payment plan. You can focus on high-cost debts, getting the most value for every dollar you invest.

  • Make Tough Choices: As we said earlier, a debt repayment plan often involves difficult decisions. There's an opportunity cost to the process. Having the right information lets you make those choices with confidence.

How to create a successful debt schedule

Now that you see the value of a debt schedule, you need to put in the effort necessary to make this a useful tool in your debt-repayment program. Here are some general steps required to get the document off the ground:

  • Gather Info About All Outstanding Debt: Make your debt schedule a comprehensive picture of what you owe. Assemble all the pertinent data so that you can make well-informed decisions about your repayment plan.

  • Put Everything into a Spreadsheet: Organize everything in a single place. This will provide a central reference place as you proceed.

  • Keep it Updated: Your debt schedule won't be a static document. Rather, it will need constant updating. As such, stay vigilant about making regular changes.

Get free of your debt load

Early on, debt can act as fuel for a burgeoning small business. Over time, though, it can become an anchor. If you've outgrown your debt load, now may be the perfect opportunity to get your startup free of some of its liabilities.

Cutting your debt comes with several benefits. You eliminate the debt service costs, limit your liabilities, and reduce your risk.

However, paying down your debt requires planning and patience. With the right strategies, you can optimize your repayment plan while still pushing your business forward.