Business debt can be a tool for growth, but when it gets to be too much, it can also prevent a business from taking advantage of opportunities to grow. 

The Experian Oxford Economics Main Street Report Q2 2023 notes that “commercial lending remains open to small businesses,” this year, but small businesses face increasing pressure as interest rates have risen. “A decision to pay some creditors more slowly and hold onto capital longer will continue to increase delinquency rates across the U.S…” 

If you’ve decided you need to pay off business debt, here are strategies to help you get there. 

How Much Debt Is Too Much Debt for a Small Business?

Business debt isn’t always bad. A business may be able to leverage debt to grow their business more quickly than if they grow organically from revenue. They use short-term debt to buy inventory, solve short-term cash flow problems, expand product lines, or to make other investments. They can use long-term debt to expand facilities, acquire high-cost equipment, or even to acquire other businesses.

It’s when entrepreneurs don’t have a clear grasp on how to use business debt successfully that they can find their business struggling to pay debt, rather than focusing on investing in their business.

There’s no single answer to how much debt is OK and how much is too much. However, there are some warning signs that debt levels may no longer be sustainable. These include:

• Missed payments
• Borrowing to make payments on debt
• Declining business credit scores
• Excessive UCC filings
• Limited borrowing options

How to Get out of Business Debt

There are several specific steps you can take to get a handle on your business debt and your business financial health. Even if you are managing your debt, reviewing these steps periodically can help your business stay on track.

1. Review Your Budget

If you don’t have a budget, now’s the time to create one. Reviewing your last few month’s worth of bank and credit card statements should give you enough information to create a basic budget, though ideally a year’s worth of data will be most helpful. You want to be aware of all sources of business revenue and business expenses, and you want to identify trends, such as expenses that have crept up or revenues that are in decline.

If your business has multiple clients or sources of revenue, categorizing income and expenses by type can help you understand which parts of your business are the most profitable.

Feel overwhelmed by the numbers? Try a budgeting app, some of which may even offer free versions. For more one-on-one help, your accounting professional may be able to help you review your financial statements and get a better understanding of your financial situation. And free or low-cost business counseling or mentoring is available through a variety of organizations. (See Step #8 below.)

2. Reduce Expenses

As you review your budget, you may be surprised how many expenses are on autopilot, including both fixed expenses and variable expenses. If you haven’t reviewed yours in a while, consider categorizing expenses in one of three ways:

1. Continue. The expense is essential and you must continue to pay for it. Payroll taxes (or any taxes) would fall into this category.
2. Negotiate. The product or service is essential but you might be able to find a way to cut costs by negotiating with the supplier or by shopping around. Employee benefits, insurance or even some contractors could fall into this category.
3. Eliminate. Get rid of the expenditure altogether as soon as possible. A variety of expenses can fall into this category. Some cuts here will be hard — letting go of an employee, for example — but may be necessary to keep your business afloat.

Don’t forget about expenses that occur infrequently, such as annual memberships or technology subscriptions. These may automatically renew if you don’t proactively cancel them in advance.

3. Increase Revenue

Sales are the standby method most business owners turn to when they need to increase small business revenue. (And here that means selling more, not necessarily selling your products or services at a discount.)

There are myriad ways to increase sales from selling more to your current customers to finding new markets for your products or services, to raising prices.

Here are four popular ways to increase your small business revenue.

If you’ve been reviewing your budget, you also know that some sources of revenue are more profitable than others. Focusing your efforts on increasing high-profit revenue can give you the biggest return on investment.

Collecting money your customers owe your business can also be a way to boost your bottom line in the short term. Some businesses find that offering a discount for prompt payment is better than trying to chase payments for weeks or months.

4. Inventory Your Debt

Before you can tackle your debt you need to clearly understand what you’re dealing with. You’ll want to have a clear understanding of your existing debt:

• Type of debt (for example, credit card debt)
• Balance owed
• Loan payment amounts
• Interest rates/fees
• Repayment terms (daily/weekly/monthly)

Check your business credit reports to make sure you didn’t miss anything. Although not all debts will be listed on your business credit reports, it will be helpful to review the information lenders will access.

You will probably have to chip away at your debt, and you may need to take multiple approaches to getting out of debt. It often makes sense to pay off the debt with the highest interest rate first but sometimes you may find it’s necessary to tackle a debt with a lower rate but onerous repayment terms. Prioritize your debts so you know which one(s) are most urgent.

5. Refinance or Consolidate Debt

Debt consolidation or refinancing doesn’t erase debt, but it can make it easier to pay it back, provided the new debt is less expensive or on better terms than the old debt. If you can refinance or consolidate with a new small business loan, such as a lower-rate line of credit or term loan, for example, you may be able to lower your monthly payments.

Or you can continue to pay the same amount each month on your new loan, but with a lower interest rate you’ll pay off your debt faster. If you’ve found other ways to cut expenses or increase revenues, you may even be able to make larger payments to retire your debt faster. (Generally, the lower your interest rate, the more your payment goes to paying back the debt, rather than interest.) And even if you can’t lower your monthly payment, locking variable-rate debt into a similar loan with a fixed interest rate may help protect your business from interest rate hikes in the future.

But don’t rush to get a new high cost loan to pay off a loan you can’t keep up with. You may pile interest on top of interest, and dig the hole that much deeper. If your only option for avoiding default is another high cost loan, move on to the next steps.  

7. Negotiate Terms

Do you have long-term suppliers or vendors? See if you can negotiate better terms with them to reduce costs or improve cash flow. Some might extend payment terms of anywhere from net-30 to net-90 days, giving your business more time to pay for their product or services. Others may be able to give you a discount if you pay quickly, saving you anywhere from 2% to 10%.

In other cases, you may need to negotiate a longer time to pay off debt you owe. Communicate with your creditors, suppliers, or anyone else you’re having trouble paying as soon as you can. If you fall behind and don’t let your creditors know you’re trying to catch up they may send your account to collections or sue your business. In a few cases, a default could give them the right to seize business assets, including funds in your business bank accounts.

If you do modify your payments, get the new payment plan in writing. Also double check whether you’ve provided a personal guarantee on the account. If you have, it may be reported to your personal credit reports and/or the creditor could try to collect from you personally. Most small business credit cards, for example, require the applicant to sign a personal guarantee. While the credit card may not appear on your personal credit reports as long as you’re paying on time, a delinquent balance could affect your personal credit as well as hurt your business credit.

Finally, keep in mind that slow payments or problems such as collection accounts or tax liens can show up on your business credit reports. Monitor your business credit so you’re alerted to any negative information as soon as possible.

8. Tap Business Debt Resources

If your debt is overwhelming and you’re worried about falling behind on payments, it can be helpful to get advice from a neutral third party. Research has found that people under financial stress may be more prone to make less-than-optimal decisions.

Some potential sources of help for debt relief:

• A business mentor from your local Small Business Development Center (SBDC), SCORE, Women’s Business Center, or Veterans Business Outreach Center. The Small Business Administration provides a helpful online locator tool here.
• Some companies specialize in helping businesses with restructuring debt. If you decide to work with one, check them out thoroughly and carefully review the contract before you hire them to help ensure you aren’t throwing good money after bad.
• A bankruptcy attorney may be able to help your business restructure debt.

Finally, keep in mind that business debt isn’t always bad. If you can secure affordable financing, use it to make more money, and have a solid plan for paying it back, you can come out ahead.

Frequently Asked Questions About Small Business Debt

How much debt is OK for a small business?

Part of running a small business owner is deciding how much risk you’re willing to take, and debt is part of that decision-making process. Ultimately, you’ll need to determine how much debt your business can handle. However, there are some metrics that lenders may use to evaluate whether a small business can handle its existing debt plus a new loan and these can be helpful as you evaluate your business debt:

• Debt service coverage ratio
• Debt-to-income ratio
• Debt-to-equity ratio

Use your accounting software to run financial statements so you can understand how your levels of business debt affect your business. If you’re not confident doing this yourself reach out to your business mentors and your accounting professional. 

Here are some gut-check warning signs that your debt may be too much:

1. You have trouble making payments on time.
2. Your business credit scores are dropping.
3. Your business is borrowing more money, at least in part, to pay debt. 
4. You must put off investing in initiatives that would improve your business because you can’t afford them due to the debt you’re paying. 
5. If there is a slight shift in revenue or expenses, you’ll have trouble making your payments.
6. You aren’t paying yourself, or you took a significant cut in your pay, in order to make debt payments. 

Can business debt be written off?

Business debt may be written off when it becomes clear that the debt cannot be repaid, but there are some painful steps that happen in the meantime. Lenders will try to collect, and if they can’t, will often turn the debt over to collections. Debt collection agencies can be very persistent in their efforts to collect. 

Your business credit reports will be damaged if late payments are reported, and there’s no limit on how long negative information can appear on business credit reports.

You or your business may be sued for the debt. If there is a personal guarantee, your personal assets and credit may be at risk. 

If your business can’t pay its debts, consider getting professional advice so you can make sure you settle your debt properly and don’t face additional legal action in the future. 

How can I get out of business loan debt?

If your business is struggling with debt, consider the steps described above in this article:

1. Reduce expenses and/or increase income so you can put more money toward your debt payments. 
2. Explore refinancing your debts and/or business debt consolidation. 
3. Consider negotiating debt/debt settlement. 
4. Investigate a sale of business assets. 
5. If the above isn’t possible, talk to a bankruptcy attorney to learn about your legal options.

What happens when a company has too much debt?

Businesses can sometimes operate for a long time with significant debt, but when something goes wrong, it will eventually catch up. If you have too much debt, it’s hard to survive normal cash flow fluctuations without making tough choices about the business.

In the Federal Reserve’s 2023 Small Business Credit Survey, businesses that reported financial challenges in the previous year took the following actions:

• Raised prices (56%)
• Used personal funds (53%)
• Used cash reserves (53%)
• Obtained funds that must be repaid (42%)
• Cut staff, hours, and/or downsized operations (32%)
• Made a late payment, or did not pay (23%)
• Obtained funds that do not have to be repaid (18%)

Only 5% of those surveyed who reported financial challenges in the past year took no action at all. 

What happens when a business cannot pay its debts?

What exactly happens when a business can’t pay its debts will depend on a number of factors, including whether the loan is a consumer loan or a business loan, whether it is secured or unsecured, the terms of the contract, as well as state and federal laws.

If a business cannot pay its debts it will go into default. That can have a number of repercussions: 

• Late fees and additional penalties may be charged.
• The balance may be “accelerated,” which makes it due and payable immediately. 
• Late payments may be reported on business credit reports. 
• The debt may go into collections.
• Business assets (including money in a business checking account) may be seized, depending on the terms of the contract and state law. 
• The business may be sued.
• If there is a personal guarantee the lender may try to collect from the owner’s personal assets. 

Falling behind on debt may have serious consequences so it’s important to try to find ways to get out of debt before your business runs out of options. 

Read: What Happens If You Default on a Loan

Should I pay off business debt?

While operating a debt-free business sounds like an ideal, some businesses find that debt provides their business with a competitive advantage. It may allow them to get inventory using inventory financing, which they can turn around and sell for a profit, for example. Or it may allow the business to invest in paid social media marketing that provides a profitable return on ad spend (ROAS).

It may allow them to invest in better equipment that allows them to produce more and/or lower costs. It may help the business purchase commercial real estate to save money on rent and/or serve more customers. 

Using all your cash into real estate or equipment may leave you unable to pay other essential expenses. Only operating with cash may leave you unable to buy inventory or advertise, which can in turn have a negative impact on the business. 

If you have the money to pay off debt, but aren’t sure whether that’s the best use of your funds, consider talking with your accounting professional or a business advisor. Ask them if they can review your business finances and help you weigh your options.

The right kind of debt for business growth

Here are the most popular types of small business loans and financing, and scenarios where they can be used successfully for business growth. 

Business credit cards

• Best For: Covering day-to-day expenses, short-term financing, and building business credit.
• Benefits: Flexibility, rewards, short-term financing.

Business Lines of Credit

• Best For: Managing short-term working capital needs or unexpected expenses.
• Benefits: Flexible, only use and pay interest on what you need; funds can be drawn and repaid as required.

Term loans

• Best For: Financing long-term growth projects, such as expansion or large equipment purchases.
• Benefits: Fixed repayment terms, potentially lower interest rates, and longer duration compared to other forms of debt.

Equipment financing or leasing

• Best For: Purchasing or leasing specific pieces of equipment or machinery without tying up capital.
• Benefits: Often secured by the equipment itself, may offer tax advantages.

Commercial real estate loans

• Best For: Purchasing, renovating, or refinancing commercial property.
• Benefits: Longer repayment terms, potential for property appreciation and/or rental income.

Invoice factoring or financing

• Best For: Businesses that need to improve cash flow due to long invoice payment terms.
• Benefits: Immediate access to cash based on outstanding invoices.

Merchant Cash Advances

• Best For: Businesses with strong daily card sales needing quick access to capital.
• Benefits: Flexible repayment based on a percentage of daily sales.

SBA loans

• Best For: Various business needs, from working capital to real estate purchases.
• Benefits: Favorable terms, longer repayment periods, and often lower interest rates backed by the U.S. Small Business Administration.

Crowdfunding

• Best For: Startups or businesses launching new products and looking for both capital and market validation.
• Benefits: Funds don’t have to be repaid (except for debt crowdfunding), build loyalty.

The Wrong Kind of Debt for for Business Operational Costs

Using debt to fund operational costs can be essential. Many businesses struggle with uneven cash flow and need to use short-term financing to cover essential business expenses. Any debt taken without a clear understanding of how it will be repaid, and how the costs affect the businesses’ bottom line. Relying on debt for recurrent operational costs can be catastrophic.

Here’s how to avoid using debt the wrong way in your business:

• Cost: Understand the cost of debt you’re considering, including interest rates, fees, and the total cost of borrowing.
• Length of loan: Ensure the loan term matches the business need, including the lifespan of the project or asset it will financing.
• Flexibility: Some loans offer more flexibility in repayment or usage than others.
• Collateral Requirements: Determine if you’re comfortable using assets as collateral, and understand what will happen to that collateral if your business cannot repay your debt. 
• Payment Structure: How much will the payments be? Will payments be required on a daily, weekly or monthly basis? Will payments be fixed or variable? Can business revenues support the payments?