Debt management for business owners

Would you be surprised to learn that many small businesses carry debt? If you’re a business owner, it may not shock you that 72% of small businesses hold outstanding debt, according to the 2023 Report on Employer Firms issued by Fed Small Business.

While debt is necessary, it’s important that it’s carefully managed with the help of a financial professional. In this article, we’ll cover different types of business debt, how to effectively reduce and stop accumulating debt, when it’s wise to file bankruptcy, and your options if this happens. 

Understand your business debt 

There are several common types of debt, including: 

  • Short-term: Typically used to cover short-term operating expenses. It can come in the form of lines of credit, short-term loans, overdraft protection and merchant cash advances. The debt is repaid within a short period, usually about a year. 

  • Long-term: Often used to finance capital investments, like vehicles, equipment or real estate. It typically carries an extended repayment period. Examples include term loans, bonds, mortgages and equipment financing. 

  • Secured: A loan or credit backed by collateral, such as property, inventory or equipment. It presents less risk and typically has lower interests. However, if businesses fail to make payments, assets used as collateral can be seized to recover the amount owed. 

  • Unsecured: Not backed by collateral; usually more challenging to obtain. Rates are generally higher. Offered in the form of traditional term loans, lines of credit and business credit cards. 

How to reduce debt 

If your business carries recurring debt, you’ll want a debt management plan. (Disclaimer: Working with a trusted professional who specializes in this field is highly recommended.) This plan can include strategies to: 

  • Assess your current debt situation. Look at all your business liabilities, including bank loans, business credit cards, lease obligations, contracts, business taxes or employee-related liabilities (e.g., wages, benefits, pension, retirement).

  • Set debt reduction goals. Determine the amount of debt you want to pay off in a specified timeframe. Be realistic, based on your budget and income. 

  • Renegotiate terms. Work with your lenders to negotiate more favorable terms for your debt. Options may include lower interest rates, extended payment terms or temporary payment relief. 

  • Consolidate loans. If available, consolidation can simplify your debt management and may lower interest costs. 

Ways to stop debt accumulation 

As you work to reduce your debt, it’s also important to see where you can cut costs so you can remove—or diminish the need for—more debt. Work with a professional to: 

  • Develop (or adjust) your budget. Implement a strict budget; adjust spending accordingly. 

  • Increase revenue streams. Are there areas of your business where you can raise prices or introduce a new product or service? 

  • Improve invoicing and collections. Ensure you’re invoicing on time and following up on overdue payments. 

  • Cut unnecessary expenses. Review expenses and see where you can eliminate non-essential costs. 

  • Avoid unnecessary borrowing. Before considering a significant purchase or investment, research the ROI and decide whether a new loan is worth it. 

  • Conduct financial reviews. To stop debt accumulation and overspending, regularly review your financial status. This keeps you on top of spending and helps avoid unnecessary debt. 

When bankruptcy is the only option

If your business carries too much debt and there’s no end in sight, bankruptcy may be necessary to reduce your business debt burden. If it comes to this, you have two options: 

  • Chapter 7: A Chapter 7 business bankruptcy is administered by a bankruptcy trustee who sells your business assets, tries to retrieve outstanding accounts receivable, pays owed taxes and distributes any remaining funds to your creditors. It eliminates any personally guaranteed business debts and provides you with a clean break from the failed business. But your personal credit rating takes a massive hit—which stays on your record for seven years. 

  • Chapter 11: A Chapter 11 bankruptcy allows your business to reorganize debts and restructure finances to pay bills. Your business continues to operate, and calls from debt collectors cease in the short term. If you have assets worth less than your debt, bankruptcy may allow you to pay only what the assets are worth instead of the balance due. Chapter 11 is costly, requires a bankruptcy attorney and can take several years. 

Consult a professional 

Effective debt management is crucial for business owners, but you shouldn’t do it alone. Work with a qualified professional who can guide you through strategies to navigate debt efficiently and keep your business on a path to financial health. 

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