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Managing Business Debt

By Spodek Law Group | February 20, 2024

Managing Business Debt: A Guide for Entrepreneurs

Debt is often an unavoidable reality for small business owners and entrepreneurs. According to a survey by Nav, 55% of small business owners carry some form of debt to help finance their companies. While borrowing money can provide necessary capital, being overleveraged with too much debt can put your business at risk. As an entrepreneur, it’s crucial to have a plan for responsibly managing your business debt.

Understanding the Different Types of Business Debt

There are a few main types of financing options business owners utilize to fund their companies:

  • Loans – Traditional small business loans from banks or alternative online lenders. These carry interest rates and set repayment terms. Popular types include SBA loans, short-term working capital loans, equipment financing loans, and commercial real estate loans.
  • Business Credit Cards – Credit cards for your company that work similarly to personal cards. They carry ongoing revolving balances, interest charges, and minimum payments.
  • Lines of Credit – A revolving credit line that allows you to access funds as needed. You only pay interest on the amount used instead of having access to the full amount.
  • Merchant Cash Advances – Lenders provide you an upfront lump sum of cash in exchange for a percentage of your future credit card and debit card sales.
  • Equity Financing – Selling partial ownership stakes in your business to investors in exchange for their cash investment.

Each type works differently and has its own pros and cons to factor while building your debt strategy.

Creating a Debt Management Plan

Managing business debt starts with creating a detailed plan that aligns with your overall business goals and cash flow capabilities. Important components to include:

Set a Total Debt Limit

  • Analyze your finances to set a responsible ceiling for your total debt load across all accounts. This ensures you don’t overextend yourself. A common metric is making sure your total monthly debt payments stay below 8-10% of gross revenue.[1]

Use Debt to Fund Growth

  • Match financing options to your needs. Use long-term installment loans to fund investments and equipment purchases expected to increase long-term profitability. Use short-term financing to smooth out cash flow gaps.

Compare Financing Offers

  • Research multiple lenders to find the best terms and rates tailored to your situation before committing. Online lending marketplaces like LendingTree and Fundera let you easily compare business loan and line of credit offers.

Build an Emergency Fund

  • Having cash reserves is vital when managing debt. It lets you continue making payments if you hit a slow sales month. Try to build up 3-6 months of operating expenses in a savings account.[2]

Use Projections

  • Create detailed 12-month cash flow projections mapping out expected financing needs and repayment abilities. Update these projections monthly as the situation changes.

Track Payment Deadlines

  • Use a calendar to clearly map out monthly payment due dates across all accounts to avoid missed payments and penalties.

Best Practices for Ongoing Debt Management

Once you have debt, implementing management best practices is key:

Make Payments on Time

  • Set payment reminders and automate payments whenever possible. Being late leads to fees and increased interest rates.

Pay More Than Minimums

  • Paying the minimum only covers a portion of the interest owed each month without reducing your principal balance. Pay extra whenever possible.

Check Credit Reports Regularly

  • Business and personal credit reports from Experian, Equifax and TransUnion should be monitored to quickly catch any reporting issues with existing debts.[3]

Reevaluate Terms Over Time

  • As your business grows and credit profile improves, consider renegotiating or consolidating debts to get better rates or terms.

Avoid Using Debt to Fund Operating Expenses

  • Debt should fund long-term growth initiatives, not everyday expenses. Using credit cards or loans to fund payroll, inventory, utilities, etc. can lead to a dangerous debt spiral.

Communicate with Lenders

  • Keep lenders updated on any relevant changes in your business situation. This builds trust and allows them to potentially provide flexibility if you hit a temporary hardship.[4]

Seek Professional Help If Needed

  • If cash flow issues make payments unaffordable, consult a business finance lawyer and an accountant to discuss options. This could include payment plans, debt consolidation, or restructuring agreements under bankruptcy protection in an extreme scenario.[5]

Alternative Ways to Avoid Excessive Debt

While responsible borrowing can energize growth, every entrepreneur should also explore alternative funding and financing options to minimize reliance on debt:


  • Launching a business without outside funding forces you to be scrappy and cash flow positive from day one. It also allows you to retain full ownership and control. Low-cost online tools have made bootstrapping more realistic than ever for many companies.

Trade Vendor Credit

  • Building strong relationships with vendors and suppliers can help secure more flexible payment terms on inventory and other purchases to ease short-term cash needs.

Angel Investors

  • Wealthy individuals provide startups capital in exchange for convertible debt or small ownership stakes. Experienced angels also provide mentorship.

Venture Capital

  • Venture capital firms provide large scale growth funding to startups deemed highly scalable in exchange for equity shares. VCs also often support with business guidance.

Revenue-Based Financing

  • Some alternative lenders offer flexible “revenue-based financing” tied to a percentage of monthly sales instead of fixed payments. This aligns repayment with cash flow.

Grants and Contests

  • Federal, state, non-profit, and even some corporate grants are available for women-owned, minority-owned, veteran-owned, and tech-focused businesses. Business plan contests also provide prizes.


  • Platforms like Kickstarter and Indiegogo allow you to raise small investments from a large pool of supporters to fund a project. Equity crowdfunding portals facilitate raising investment capital from unaccredited investors.

Key Takeaways

Managing debt doesn’t necessarily mean eliminating all debt. When used strategically, borrowing can provide the funds needed to increase profits over the long-term. But becoming overleveraged puts your company at risk. By setting limits, matching debt to usage, comparing lenders, and implementing ongoing best practices, entrepreneurs can achieve responsible leverage.




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